• David J. Perrotto

Staying the course


In this tumultuous and uncharted time these past two years, Perrotto Private Wealth knows it is important to have a long-term perspective that can guide our emotions, and help us make better decisions over the years, avoid routine pitfalls, and improve the chance of a positive financial outcome.


During my financial planning career, I personally have been through many crises that have disturbed the markets such as starting my career a few years after the September 11th terrorist attack, then having to guide clients past the Financial Crisis of 2008-2009, and most recently the COVID-19 virus-induced global economic shutdown of 2020. These events have shaken the confidence and long-term conviction of investors. While the reason for the downturns was always different, the market response was frequently very similar. Below you will find some thoughts and lessons and a research report (How-To Handle Market Declines) that I think are valuable and will appeal to your inner voice of reason.


Hopefully, they will help subdue the emotional instinct that may have you feeling that just because the market is down right now, it means that the market will never recover.


Simple Phrases and Emotional Discipline


“Be greedy when others are fearful, and fearful when others are greedy” – Warren Buffet


What I learned over my financial career is that financial discipline is the hardest thing to conquer. Simple phrases like this from Warren Buffet seem to encapsulate the optimal market behavior and are a staple of raising successful financial outcomes. Times like these remind me of when I went to a seminar in the middle of the 2008-09 financial crisis. That exact phrase was told to the audience of industry experts from the keynote speaker.


We were all asked if we believed it, and that we should stand up if we did. Almost unanimously, the whole audience stood up. Then the presenter told us to remain standing if we were acting like Warren Buffet and buying when the market was down. Only a few of us in a room of hundreds remained standing. It is hardest to stay the course when the negative headlines keep coming and the financial atmosphere seems dark. Warren Buffet just disclosed that he bought over $5 billion of stocks last week.


“Buy low and sell high”—the billionaire’s secret Another market phrase repeated through the years is, “buy low and sell high.” For that phrase to hold, the market must be down for prices to be below our historic averages. So why do we hate when prices go down so much? It is the source of potential future growth. Further, we wouldn’t advocate selling your house when the price goes down, yet many emotional investors feel the impulse to sell their stock holdings when prices are down. While we don’t know when the negative cycle will end, it will end, and patient, long-term investors have historically been rewarded. Over, and over, and over again.


On the first page of How To Handle Market Declines, you will see market downturns happen frequently but don’t last forever.


Historically:

A decline of -5% or more happens 3 times per year;

A decline of -10% or more happens approximately once per year;

A decline of -15% or more happens once every 3 years;

A decline of -20% or more happens approximately once every 6 years.


As noted on the second page of How-To Handle Market Declines, every S&P 500 decline of -15% or more, from 1929 through 2020, has been followed by a recovery. The average return in the first year after each of these downturns was about 55%.


“The market climbs a wall of worry”

Remember that markets hate uncertainty, and asset mispricing is the worst when uncertainty is highest. Today you have the uncertainty of interest rate policy, hyperinflation, mid-term elections, and now geopolitical risks with the Russian/Ukraine war. As in previous cycles, the unknowns will become more known with time, only to give way to new worries and concerns that build the “wall of worry.” Before all this, we had the pandemic, and before the pandemic, we had interest rate hikes, and before that, we had the 2016 election. Each of these things brought uncertainty, mispricing, and as the unknowns became known, we moved past each one.


Over the years, we’ve found that a key to recognizing this is when investor mindset and consequent conversations move from long-term outlooks to short-term. During uncertain times, we’ve heard from some clients saying, “let’s just get out of the market until things ‘calm down,’ which generally means, “let’s get back in when the market has gone back up and prices are higher.” As you can see from page two of How To Handle Market Declines, that short-term mindset can have very dire long-term consequences. Missing out on just 10 of the best days in the last 10 years would have compromised 44% of the end value of the investment. Missing just 30 days would have eroded nearly the whole decade’s worth of benefit. Staying the course and staying invested has been a proven way to boost your chances of financial success.


The final page of "How To Handle Market Declines" summarizes this in a great way:


"It's always important to maintain a long-term perspective, but

especially when markets are declining. Although stocks rise and fall in the

short term, they’ve tended to reward investors over longer periods.

Even including downturns, the S&P 500’s average annual return over all

rolling 10-year periods from 1937 to 2021 was 10.57%."


It’s true-to-life for emotions to become exasperated during periods of volatility. Those investors who can tune out the news and focus on their long-term goals are better positioned to plot a wise investment strategy.


I always believe this is a sensible time to add to your accounts, particularly long-term investments. As we all know, time makes money, not timing, but tactical investment opportunities like this present themselves every so often. Taking advantage of unexpected opportunities takes courage (buying low and selling high), but that’s one way your estate can unexpectedly quickly increase.


Perrotto Private Wealth continues to pray for the Ukrainian people and that this war subsides and resolves. As always, please feel free to call me to discuss any of your concerns at 718-551-7131. Stay healthy and safe.


David J. Perrotto

Founder and Financial Advisor

Perrotto Private Wealth



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