Taking stock of your financial moves? What everyone's doing might be all wrong for you

Q. With the S&P 500 index down more than 10% from its recent high, it seems everyone is selling, and I wonder if I should too.? — Dave in Cocoa Beach

A. Dave, if you are asking if the market will go down a lot more from this point, the answer is I don’t know and no one else truly knows either, even if they sound sure of themselves. Your parents probably taught you that things are not always what they seem and doing what “everyone” is doing isn’t always wise. When it comes to markets, that is a good lesson to remember.

The fact is very few are selling. Most people are holding and not trading at all. The daily volume of shares traded is in the billions, but that is still a small fraction of all the shares that are tradeable.

Further, every share that is sold is also bought. Always remember that you cannot buy something unless someone is willing to sell and you cannot sell unless someone is willing to buy.

Financial media often refer to 10% declines as “corrections.” Historically, corrections occur in about half of all calendar years on record. About one in five years, the correction will get worse and become a “bear market,” commonly defined as a decline of 20% or more. The average bear market decline has been over 30%. There have been two bear markets in excess of 50% declines in the last 25 years.

Bear markets can be annoying, anxiety inducing, even terrifying and result from widely varying causes, but short-term fluctuations are entirely normal. If you take a long-term view, short-term fluctuations are not important. All bear markets ended, and the market recovered in plenty of time for those with sound portfolios to benefit. You should expect frequent periods of decline in the market, not fear them.

Even if “everyone” is doing something, that doesn’t make it a good choice to follow along. There is a phenomenon wherein people make decisions based on little more than the behavior of others. It is known as an information cascade. Here’s an example you have probably experienced yourself.

Recently, I walked up to the elevator in my office building and there were six people standing there waiting. The first person there failed to push the button. The second person who arrived assumed the first had pushed it. Persons 3-6 saw the others standing there and decided to wait, too, based solely on what they saw others do.

When I arrived, all six were scrolling on their phones. My phone was in my pocket, so I wasn’t distracted and noticed the indicator light was not lit. I pushed the button, and we all had a chuckle.

When an information cascade occurs at the elevator, it is not a big deal. When it pops up in our personal finances it can be a problem. From an investment perspective, information cascades can explain, to a degree, some of the momentum we see in particular markets or individual securities. The herd mentality is a big contributor to how both bubbles and crashes are created.

It is easy to get caught up in what “everyone” seems to be doing but you’ll be better off and make better decisions more often by focusing on what’s best for you over your lifetime rather than what may or may not be happening right now. Good investment management involves making adjustments when markets make significant moves but large moves in and out of the market has a terrible record over meaningful periods of time.

Having a sound custom tailored plan that expects volatility and is managed with discipline and patience has been a much more reliable approach than trying to forecast events based on the news and the market’s reactions to those events. Both can be challenging, but resilience has been more reliable than nimbleness. Plus, if you are well diversified, your account balances should not be down as much as the stock market.

Dan Moisand, CFP® has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, e-mail dan@moisandfitzgerald.com, visit  moisandfitzgerald.com or call Dan at 321-253-5400, ext. 101.