Broker Check

How We Measure & Compare Things

| January 18, 2022

Early winter in Minnesota was mild.  Finally at the end of December/early January we got “the cold”.  We had several days of air temp of -15 (with wind-chill of -25).   Just the other day I was “out and about”, and I thought to myself – this feels warm.  When I checked the temp, it was 15 degrees above zero.  That’s a 30-degree swing.   Granted, 15 degrees is cold, but it felt okay by comparison.   The opposite is also true – a drop from 70 to 40 feels cold.  Why am I telling you this?

We anchor to what we know and what we have experienced recently and use it to measure the relative “value” of what happens next.  Our judgement of what’s normal is based on what we have recently experienced.  Human nature is so interesting!

2021 is in the books and the books say that this was one of the easiest years to be a stock investor.  We had very good returns in the market, and we had those returns with very little volatility.  The maximum drawdown was around 5%.  Not 5% in a day – it took over a week for that to happen from top bottom. That’s not normal – in case you were wondering.

With a year like 2021, we can get complacent.   That means that we will likely be much more sensitive to normal volatility in 2022.  A 10% downturn might feel huge (when it is perfectly normal).  Statistically, the average intra-year drop in the stock market is 14% and even when that happens, returns have been positive 32 of the last 42 years.  Source:  FactSet, Standard & Poor’s, J.P. Morgan Asset Management.  

Our job at Financial Planning Partners, is to remind you to not anchor to last year, but to be prepared for whatever the future holds. Your expectation should volatility, not be another year like 2021.  We also want you to be prepared for volatility, so you are less likely to make knee-jerk, emotional decisions that are very costly. 

We believe that it’s not a question of IF we will have volatility, it’s a question of WHEN It will happen.  We can’t predict, but we can be prepared.  While you are feeling calm and good about last year, think about what you would do if the market dropped 15%. 

Then, Let’s get a plan together, so you avoid that emotional overreaction.  Call us at 612 436-3733