"If you cannot control your emotions, you cannot control your money."
Warren Buffett
As much as all of us would like to believe we can always make rational decisions about our finances, the reality is otherwise. When our personal situations are promising and the business climate is favorable, we readily respond to questions about risk tolerance and affirm our ability to deal with bumps in the road ahead. Yet during times of extreme volatility, such as we experienced in late Spring, our rational selves are frequently overwhelmed by our emotional selves.
When this year's roller coaster was headed for its steepest drop, few of us were able to keep cool heads and accept the reality that the plunge was not signaling the end of the world.
There have been many plunges in the past and there will be more ahead. In only a few weeks, this latest drop approximated the extent of the pullback from late 2008 to March 9, 2009, which took place during the banking crisis. But, as dramatic as it was, it paled in comparison with that of October 19, 1987, when the Dow dropped 22.5% in one day.
At each of these times as well as others that have come before, these unsettling moments have proved to be exceptional buying opportunities.
On October 19, 1987, the Dow Jones Industrial Average fell to 1,738.74. Since then, it has climbed 1435%.
On March 9, 2009, the Dow fell to 6,547.05. Since then, it has climbed 308%.
On March 23rd this year, the Dow fell to 18,591.93. Since then, it has climbed 44%.
Although periods of great volatility can be unsettling, they have always been the worst possible times to let emotions guide your financial thinking. In an optimal world, one would hope to sell at the top and buy at the bottom. We are not living in an optimal world.
Far better to appreciate the fact that the long-term path of least resistance is up. You can rest assured that the Dow will reach 50,000 before it hits zero.
N. Russell Wayne, CFP
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