7 Stages of Grief

Analysts and experts have been predicting a market correction for many quarters. However, did anybody predict such a large and sudden plunge?
Economists said we were in one of the longest economic expansions in U.S. history (2009-2019) and that a recession was somewhere on the horizon. Investment analysts said U.S. stocks were due for a correction after big increases in 2017 and 2019.

Yet few were prepared for the double-whammy of two “black swan” events: both a global pandemic and a crash in oil prices. Many investors have found themselves playing catch-up to get ahead of the change in market conditions.

Scholar and option trader Nassim Taleb coined the term “black swan” to describe a rare and surprising event that has enormous impact. The current situation is unique, yet not without similarities to past cycles.

By quarter end, we had reached a far better understanding of facts and events. Yet the future remains uncertain. Forecasts of economists and analysts tend to mirror whether they are naturally optimistic or pessimistic.

Franklin D. Roosevelt was an optimist. He said:

“Things in life will not always run smoothly. Sometimes we will be rising toward the heights—then all will seem to reverse itself and start downward. The great fact to remember is that the trend of civilization itself is forever upward; that a line drawn through the middle of the peaks and the valleys of the centuries always has an upward trend.”

This is, I believe, true of history and financial markets. We will get through this.

Coronavirus, Bear Market and the 7 Stages of Grief

Seasoned investors are no doubt familiar with the stock market cycle and the various emotions triggered at each stage.

I often am struck by how similar these emotions are to the 7 Stages of Grief, which begin:

Shock and Denial
Pain and Guilt
Anger and Bargaining
Depression and Loneliness

During March, investors voiced these feelings and we experienced them ourselves. Since investors tend to anchor their net worth on the peak value, an overwhelming feeling of loss is expected after March’s large and sudden decline.

As of quarter end, we have just begun to hear and feel the later stages of grief:

The Upward Turn
Reconstruction and Working Through
Acceptance and Hope

The quarter ended only five weeks after the stock market peaked and U.S. equities experienced an historic 30% decline over just 22 days. For wealthy investors, it may be too soon to be looking for a light at the end of the tunnel.

Perhaps you have noticed commentators on TV already suggesting “silver linings” and encouraging investors to think long-term. While they may be correct, their late stages of grief appear out of step with most investors.

Bear Markets. Remember the Great Financial Crisis of 2008-2009? The market decline lasted 18 months from peak to trough and our subsequent recovery has lasted 10 years.

It would be great if this bear market only lasted 6 weeks, but this is not the most likely outcome. While the magnitude of the decline from late February to mid March may already have marked the bottom, likely the market will sway back and forth for a few months. Before addressing economic issues, the magnitude of the healthcare needs to fight the coronavirus must be addressed in the U.S. and globally.

If the subsequent recovery is similar to past cycles, the stock markets will not exceed the prior peak for 3-4 years.

Lessons from Experience. While we all desire terrific results, there are no guarantees. The best place to start is with a good process to manage through a bear market. We rely on discipline from prior market cycles, including:

Diversification helps. It is relatively easy to achieve through mutual funds and exchange-traded funds. Diversification reduces the risk of picking an investment that declines more than the average or rises less.

Rebalance often. If your asset allocation target was 70% stocks, you probably sold some after the excellent returns in 2019. If your stock allocation has dipped below 70% today, consider shifting back into stocks.

Utilize Time Diversification or Dollar Cost Averaging. These are complicated terms for a simple concept: Do things in small pieces. If you recently received a windfall of cash for investing, instead of putting it all to work today, buy 10% of your portfolio each month for the next 10 months. Your first purchase may be too early, your final purchase may be too late, but overall you can reduce the stress of trying to pick the perfect entry point.

Think about your investment horizon. In January we opened a Roth IRA for a 17-year-old. Her investment horizon is literally 50 years. This portfolio would be a great place to be 100% stocks. Some investors need to make tax payments in a few months. This would not be a good place to own stocks because the horizon is significantly shorter. Are you considering a move from bonds to stocks in your family’s investment portfolios? Start with your portfolios that have the longest investment horizon.

If these investment concepts seem unremarkable given the recent market volatility, remember: Your goal should be to establish a good process. Control the factors within your ability. Try not to stress about the daily movements in the market, which largely remain out of your control.