The Investment Scientist

The Real Danger of A Market Decline

Posted on: June 30, 2016

tumblr_m2hyojmKqo1qes27do1_1280.jpgI was an amateur pilot. I remember vividly an episode happened during a training class ten years ago.

That was a very windy day. Up to that point, I had only experience flying in calm weather. As soon as my Cessna took off, I immediately felt the difference. My plane was tugged and pulled in all directions by cross winds. I felt like I was losing control of the plane, and fear swelled up from the bottom of my spine to the top of my head. I sat stiffen in the pilot seat and my sweaty palms grabbed tightly at the control handles like a sinking person holding onto a straw.

My trainer sensed my tenseness and she asked: “Are you OK?”. Not willing to acknowledge my fear, I asked her instead: “Is it more dangerous to fly in turbulent weather like this?” The trainer smiled and said: “It is not more dangerous to fly in turbulent weather. The plan was built to withstand any turbulences. But occasionally, an amateur pilot would lose his cool and do something stupid. That’s the real danger.”

Chart of market declines and recoveries
Market Declines and Recoveries

 

I’ve been saying all along that a market decline caused by a crisis should be considered as a temporary discount of assets prices as opposed to a permanent loss of wealth. The chart above is the evidence. You only permanently lose your wealth and give up all future gains when you freak and sell at the bottom. That’s the real danger.

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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