A Drop or a Loss?

© Can Stock Photo / jamdesign

Recently a client informed us that another person told her that her primary investment account may be invested too aggressively. We asked what the basis was for that conclusion. The explanation: “If the market corrects, I would lose money.”

Anyone who has followed us for any length of time could probably spot the two questionable ideas contained in those eight words. It is worth discussing, because, in our opinion, getting these ideas right may help our clients build wealth more effectively.

1. There is no “if” about the next market correction, it should be when the market corrects. Why act as if we could avoid corrections when we know they will happen and they cannot be reliably predicted nor traded?

2. Is a drop in the market a loss?

We have many long term clients who have lived through dozens of 3-5-7% drops, a fair number of 10-20% declines known as ‘corrections,’ and three or four bear markets with drops of more than 20% in the major market averages. Yet they are sitting on cumulative gains—account balances in excess of the net amount they invested. One might reasonably ask, “what losses?”

The key to our plan, of course, is remaining on course even in difficult conditions, which we know will happen from time to time. We described our efforts to build a client group with this characteristic in our article Niche Market of the Mind.

It is worth mentioning that much of the conventional wisdom about investing assumes that, indeed, a drop in the market is a loss. Furthermore, since many people behave ineffectively when it comes to investing, the conventional wisdom seems to be that everybody behaves ineffectively—doing the wrong thing at the wrong time, again and again—as if it is inevitable for everyone.

It is almost as if statistics about the average weight and exercise habits of Americans are taken as proof that no group of relatively fit people show up at the gym at 6 AM to work out.

We are grateful to be working with you, a group of clients who are disciplined and fit when it comes to effective wealth-building behavior. If you have questions about this or any other topic, please call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.