Keep Calm and Carry On

As of November 20th, the U.S. stock market is flat year-to-date, having given up all gains for the year.  The story for foreign stock markets is worse, down double-digits for the year. After one of the calmest years on record in 2017, this year has seen volatility return with a vengeance with two market declines greater than 10% from a previous market high.

Periods of low volatility, as seen in 2017, can cause us to become complacent in our thinking about how the stock market is supposed to behave. The recent market declines and volatility occurring since the end of September can be emotionally jarring for even the most experienced long-term stock investor.  Research from behavioral finance tells us that people experience losses emotionally with twice the impact as the same percentage change on the upside.

Mark A. Reinecke, PhD., a professor of psychiatry and behavioral sciences at Northwestern University’s Feinberg School of Medicine, wrote a great book called Little Ways to Keep Calm and Carry On: Twenty Lessons for Managing Worry, Anxiety, and Fear (New Harbinger Publications, 2010). Dr. Reinecke writes that it is important for us to critically evaluate why we are feeling distressed: “Make your beliefs, attitudes, thoughts, and expectations account for themselves. Are they true? Are they consistent with the evidence of your life? Is it reasonable and helpful to look at things this way? Is there another way of looking at things?” (P.87 Kindle version)

One good way to make our anxious thoughts “account for themselves” is to reflect on historical facts about the stock market that can help us to keep the recent volatility in perspective:

  • “CFRA Research reports that since World War II, there have been 56 “pullbacks” (declines of 5% to 9.9%), 22 corrections (10% to 19.9% selloffs), and 12 bear markets. Stocks recovered all their losses within two months of a pullback and four months after a correction, on average.” (Source: Matt Topley, Fortis Wealth)
  • Here is a chart showing average annualized returns after a market decline of more than 10% from 1926 – 2017 (Source: Dimensional Fund Advisors):


  • Some people feel anxious even when markets hit new highs. Here is a chart showing average annualized returns after new market highs from 1926 – 2017 (Source: Dimensional Fund Advisors):


  • Sometimes it just helps to see the whole timeline of historical returns in terms of bull and bear markets to see how periods of rising stocks have dominated periods of falling stock prices (Source: Dimensional Fund Advisors):

  • In spite of all this evidence, we may still be tempted to try to avoid future stock downturns by timing the market, selling whenever things start getting volatile. We forget that markets often spring back sharply after a selloff, gaining back lost ground in just a few trading days. Here is a chart that shows how being out of the market during big up days can hurt long term future performance (Source: Dimensional Fund Advisors):

It is often good for us to take a deep breath in times like these and have a heart-to-heart talk with ourselves, especially when we are feeling overly concerned with what’s happening day-to-day in the markets. Remember the investment adage that without risking your capital, there can be no reward. The historical long-term rewards from investing in a well-diversified stock portfolio don’t come without risk in the form of volatility. Consider that to be the price of admission.

It is good to stay the course and let the markets reward you for your patience over the long run. Investing is not a pass / fail situation. It is true that future returns are unknown, and past performance does not guarantee future returns. Nevertheless we have good reason to expect positive returns over the long run as long as the fruits of free enterprise, capitalism, and entrepreneurship continue to create wealth for its owners.

John Finley

John serves as Chief Investment Officer for Coyle Financial Counsel and is responsible for overseeing the investment process. John’s prior experience includes managing institutional fixed-income portfolios for corporations, pension funds, non-profit organizations and foundations at several large, global asset managers. With more than 20 years of institutional investment experience, he is energized by helping individuals understand the role investing plays in meeting their long-term financial goals.
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All information is from sources deemed reliable, but no warranty is made to its accuracy or completeness.   This material is being provided for informational or educational purposes only, and does not take into account the investment objectives or financial situation of any client or prospective client.  The information is not intended as investment advice, and is not a recommendation to buy, sell, or invest in any particular investment or market segment.  Those seeking information regarding their particular investment needs should contact a financial professional.  Coyle, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material.  The opinions expressed were current as of the date of posting, but are subject to change without notice due to market, political, or economic conditions.


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