Broken Down Bus

Nothing drums up a sense of doom more than a quick drop in the market.  When major indexes hit a rough patch—shedding 10% or more from recent highs—many people remember the pain of past recessions and see their hard-earned money vanish.

For some investors, this rollercoaster performance may seem unusual and dramatic, but it’s actually a regular and even desirable feature of the market.

Drawdown SPY

The S&P 500 has on average dropped 14% each year dating back to 1993. Of course, a large part of that comes from the Dotcom Bubble and 2008 Financial Crisis when the market plunged over 50% from its respective highs. Even so, major indexes will endure small 1 to 2% pullbacks in a given week or month. Those corrections, however scary, present an opportunity for investors to put new money to work and set realistic financial goals. It’s these series of conflicts and misfortunes that shape the investment narrative, just like a bad episode of a great TV show

Look at Television’s Greatest Shows

Consider the most pivotal moments in TV history; the red wedding in Game of Thrones, Walter White saving Jesse in the series finale of Breaking Bad, Omar killing Stringer Bell in the abandoned warehouse. Each scene is a turning point in the show that provides closure to one storyline in tense and dramatic fashion. Now suppose every episode had a similar discovery or crucial moment; the show could never live up to expectations. Viewers would consistently ask “What can they do next?” or “How are they going to top last week?”. We need those painfully slow or nonsensical episodes for the momentous episodes to leave a lasting impression.

Take the “Fly” episode in Break Bad. It’s perhaps the most polarizing, boring episode of the series. Walt and Jesse are busy cooking in Gustavo Fring’s laboratory when a fly enters their workspace. The whole episode focuses on the two protagonist’s futile attempts to wipe out the insect. Despite appeasing no one, the “Fly” was crucial in developing Walt’s relationship with Jesse and fear of Gustavo. Later we see what lengths Walt is willing to go to protect himself, family, and friends (really just Jesse). The dull moment also makes the climatic end of Walt and Gustavo’s partnership in the nursing home that much more enjoyable

Sure, this doesn’t sound like an investing lesson, but pullbacks, like a bad episode of TV, help investors set realistic expectations about the future. They’ll begin to view the market in terms of its long term growth potential, such as buying a house or retiring comfortably, rather than a lottery ticket. So when the market turns sideways, your first thought will be “stay the course.”

Part of that change in mindset will mean trusting timeliness investment principles. These are concepts echoed in every finance 101 class: trust in diversification, rebalance on a frequent basis, know your risk tolerance, and buy the dip.

So the next time the market tumbles or an episode jumps the shark, remember these moments improve your long-term satisfaction.

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