How Will You Respond When The Market Goes Down?

The stock market is like a child with a yo-yo on an escalator. The escalator is long-term results, while the yo-yo moments are short-term gyrations. As investors, our goal is to focus on the escalator, not the yo-yo. But to some degree, we utterly lack the emotional financial maturity needed to avoid the yo-yo’s request for attention.


Having enjoyed a relatively tame bull market post-election, we are embracing for a reversal of fortunes. Of course, no one knows the time, day or depth. However, when it happens, you will respond. The question is: How will you respond to the next market downturn?

It is likely you will respond like one of the following four people:

Debbie Double Downer

Debbie Double Downer has been sitting on her cash, patiently waiting for the market to crash. She pulled out at the perfectly wrong time in 2009 — at the bottom. She’s not the only one who messed up in the great recession.

Like many of her friends, Debbie fell into groupthink freak-out mode and permanently lost money. Now, Debbie Double Downer’s goal is to time that next market crash and double down her money to make up for last season’s money mistake. Debbie Double Downer likes to read forwarded emails from people who sell gold and talk about the president’s secret agenda to destroy the world.

Ricky Regretter

Ricky Regretter regretted not buying Ford and Microsoft in the great recession. He knew the market was on sale, but couldn’t muster the courage to buy. He loves Shark Tankand gets a dopamine burst with every good deal. With stock prices at all time highs, Ricky Regretter can’t wait to grab a handful of stocks on a dip.

He learned recently that the bottom of the market was March 9, 2009, when the S&P 500 Index was at 676.53 and, as of July 17, 2017, the S&P 500 Index was at 2,457. That’s a lot of growth. Ricky doesn’t want to miss out on that once-in-a-lifetime chance to invest again. Unfortunately, Ricky Regretter gets bewildered when the market pulls back 5% or 10%. It’s in these moments he asks himself, “Is this the next big one?” Ricky Regretter was cash poor in 2009 but has been saving and now he’s ready to catch the next wave. But can he really time it?

Freddy Flashback

Freddy Flashback remembers 2008 and 2009. Every time CNN posts the headline “Dow Drops 100 Points,” he gets a nervous twitch. Even though he recovered his losses from that scary season, he doesn’t want to have the same experience. It was frightening times and he doesn’t want to take the risk. In the meantime, he’s cautiously invested in the market but he’s got his sweaty thumb on the “sell” button.

Stacy Statement Scrapper

Stacy Statement Scrapper by no means looks at her monthly statements. She glances at the envelope label and scraps them in the recycle bin. She’s built a portfolio that is well diversified and it’s good enough for her. She doesn’t really care if the market goes up or if it goes down. For her, everything with investments is long term. A yearly review is adequate and yo-yos are of little interest compared to the elevator. Stacy Statement Scrapper doesn’t buy into the fact that anyone can really time the market. She is annoyed by the sound of Jim Cramer’s voice and doesn’t want to waste energy or time becoming a market guesser. Her philosophy is, “In the end, the tortoise beats the hare.”

Each of these people has an opinion about the market-based on prior experiences and how they may respond. The funny thing about the market is that each time the yo-yo rises and falls, it’s a bit different than the last season — it’s a little faster or slower, stronger or weaker. With these differences, it’s important to recognize that our personal investment experience may rhyme with last season but it will not be the same.

Before you mess with your money as the market messes with your mind, execute these four action items:

1. Gauge impact. Go to a Walmart parking lot and ask yourself, “Have people stopped shopping?” If you witness hundreds of people swiping their debit and credit cards, then the market is still functioning.

2. Seek advice. Seek advice from someone who has experience with investing. That person should have data independent of sensationalized headlines.

3. Turn off the TV. The media truism is real, “If it bleeds, it leads.” If the market is slightly bleeding, then you will hear the magnified messages about hemorrhages and death.

4. Don’t cling to a celebrity to support your feelings. Admit it. No one knows. I don’t care if it’s a billionaire like Mark Cuban or a fund manager like Ray Dalio. Despite their intelligence, they really don’t know what the future holds.

As you mentally prepare for the next downturn, reflect on your prior experience but don’t let the emotions sidetrack you from logical cerebral investment decision-making needed to succeed.