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Your 401k & Market Volatility


[Full Script]

Hi there, this is John Enright with Custom Wealth Management.  I wanted to take a few moments to speak with you regarding your 401k Plan.  With the spread of the Coronavirus we have clearly seen a tremendous amount of volatility in the stock market.  

Chances are that you are filled with concern for your financial future as well as fear for the future of the stock market and the well being of the Country and World at large.

I can’t help but have similar feelings given all the information that we receive via the internet, television, radio and our smartphones.  I would like to put some of this in perspective for you. 

Monday, March 16, 2020, ended up being the second worst day in the 124 year history of the markets.  The worst day in stock market history was October 19, 1987 where the market dropped by over 22% in one day.  

While March 16 was a very small loss compared to that disturbing day in 1987, it was still a day that most of us will remember for a very long time.  In our office, we felt like we were fighting an avalanche with a pitchfork at times, yet we consistently reminded one another that we are strong, that we are confident in the ability of the United States to get through this, and that we have been through this before.

I would like to help you in understanding what this most recent volatility means for you and what the future might bring.  First and foremost, is understanding the impact of emotions and how emotions lead many to make very unfortunate decisions.  This is very common in 401k plans where you see your hard earned money going down in value after 10 years of seeing it increase.  Whether you had money in the market or not through the 2008 – 2009 bear market, you more than likely experienced a similar emotional roller coaster as you are today.

 This piece reflects a traditional market cycle and the emotions that tend to occur during the different points in the cycle. These emotions are only natural and although we all felt the very same fear and anxiety you experienced on Monday, we are confident about what is on the other side. 

We will most likely all experience feelings of fear, anxiety and/or guilt throughout this cycle  It is important that you recognize where there is chaos there is often financial opportunity. Warren Buffett is the master of separating emotions from finances and the result has been clearly significant.  While I have been doing this every day of my life for the last 21 years, I still experience these very emotions.  

However, I also recognize how important it is that I take control of my emotions and not allow the way I am feeling to influence my decision making.

What you see on your screen now is the result for the average investor being far worse than the major indexes over the last 20 years.  This is a very powerful piece to understand.  One of the greatest reasons for this is emotions.  The obvious rule with investing is to buy low and sell high.  But, one's emotions tends to lead them to do the opposite.  

Sell when things are not good (markets are low) and buy when things are better  (market are higher).  That is clearly selling low and buying high. 

Even worse, typically when one sells it takes them time to get back in the market.  You see, if you were fully invested over the last 20 years ending December 31, 2018 in just the SP500 your return would have averaged 5.62%.  

However, if you had missed just the best 10 days of that 20 year period, your return would have been cut by more than half to 2.01%.  

Miss the 20 best days, and your return goes negative.  That’s right, missing the best 20 days out of 20 years led to a negative return over the entire time period.  Some may think it is hard to miss those best days, however considering most that sell do so on the worst day, or close to it, and does not get back in for some time, consider this fact:  

Six of the best 10 days occurred within two weeks of the 10 worst days!

Our goal is to help prevent you from being part of the statistics you have seen on these slides.  For those who do allow their emotions to get the best of them, investing becomes a very difficult challenge.

I am also confident that the use of the phrase “The New Normal” will increase in the near future, just as it did after the 2000-2002 and 2008-2009 bear markets.  We were here during those bear markets and we will be here through the current and future ones as well.  We will be your voice of reason

We agree, this time it is different.

But, what is different is not the resiliency of this fine country, but the actual cause of the decline.  Interestingly, the cause of every decline has been unique.  What has remained the same is the strength of each one of us to prevail, to respect one another and to grow from the experience.  

This time will prove no different.

In fact, history has proven that continuing to invest just as you are, on a per paycheck basis, you are buying throughout the market cycle.  Keep doing just that, you are getting your investments at great sale prices now!

In closing, it is also very important to understand the approach taken when selecting the investment options in your 401k plan.

The Trustees go through a regular and stringent review process to determine which positions should be included in the plan and whether they should be retained, placed on the watch list or replaced.  An important tool, referred to as the Investment Policy Statement, establishes the criteria for this process.

Thank you and we invite you to reach out to us with any questions you may have.

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