Broker Check


This is Normal

January 26, 2022

The stock market has been volatile (in the downward sense) this month and especially volatile Monday and Tuesday of this week.

So, what’s going on? Has this happened before? Or, is this time different?

This time is never different.

And what is going on now is, well, normal. It is ordinary. It feels crazy but this is what happens in the stock market from time to time.

If you’re reading this and you are a client, you can recall the times I have said the average drawdown annually…like in every year… is right around 14%. (The chart attached backs this up.)

Yesterday, the S&P 500 closed at 4356.45. That is 9.6 % off the 52 week high of 4848.62. So as of yesterday, less than a 10% drawdown. Hmmm. Not even average.

Are we done? That is not knowable. That uncertainty is the price we must be ready to pay for the premium returns provided by the stock market. A drop of this magnitude is absolutely ordinary.

Sometimes if feels scary to see your account balance drop. Feel that uneasiness but do not react to the emotion.

This too shall pass. When? That is the question no one can answer.

(Source: S&P 500 data from, Historical data)

What did inflation of over 8% feel like?

During they years 1969 through 1983, inflation exceeded 8% in 7 of 14 years and averaged 7.28% during this period.

The S&P 500 was negative in 5 of those years. The 1973-74 period were brutal years because of the worst recession since the Great Depression.

What happened?
The U.S. put a man on the moon on July 20, 1969 and after that it felt like the wheels started coming off. The Vietnam War was pulling us in deeper and deeper. We didn’t know it yet, but the Pentagon and the President knew we could not win - but didn’t tell us. Johnson and Nixon didn’t know how to get us out while saving face. So we lost the war, we lost face and lost our national confidence. And we continued to spend the national treasure on Great Society programs which are still in place today despite not having the impact the Democrats, led by LBJ, sold us.

How would you feel if one day you pulled into a gas station to fill up your tank and found you were 10th in line for the pumps, you were limited to 8 gallons of gas and the price had gone up 3-4 x from your last fill-up. And you hoped you got gas before the gas station ran out. That was 1973.

During 1978-1980, the company I worked for gave employees 6 month increases of 6-8% just to stay even (or close) with inflation. In many cases, after the raise you still had less take home pay because your income taxes were based on higher (phantom) income while the purchasing power of what you had left over had dwindled. You, in effect, had a stealth tax increase.

People of a certain age remember this period very well. Avoiding inflation is important to us because it’s insidious, nasty and really hard to get rid of. It took a Fed Funds rate of 22% and a severe recession to break inflation. You had to get money out of the economy.

Are we heading back into a similar situation now with the massive Federal spending due to coronavirus and now the Biden stimulus plans? Could be. I hope not. But now, the Fed is well aware of what it took to tame inflation of the 70’s and early 80’s. They didn’t know back then (if they did they couldn’t execute). They know how now. History is clear. It is painful to be late.

A Big Risk?
Should you be concerned? Concerned, yes. Overly concerned, no. When will inflation return, how much, and for how long? If you know the answers to those questions, then you can plan for it. If you don’t know, it’s really hard to base a good investment strategy on things that might happen someday…maybe.

One more thing to consider, you can probably take some comfort knowing that inflation is now a headline risk, and when is the last time anyone saw the big risk coming?

To provide some context for that period of time, I include a brief summary of the chapter “Attacking Inflation” from Paul Volcker’s book “Keeping At It”.

Ten days into Paul Volcker’s first term as Fed Chairman, the board took action to raise the discount rate half a percentage point to… 10.5%, a record. (Compare to today’s .25%)

Market interest rates were already high by historical standards, but inflation was still higher, growing by then at an annual rate of close to 15%, the fastest ever in the U.S during peacetime. The Fed concluded a recession was likely…soon.

Price stability had always been the ultimate responsibility of the Fed…now it was in focus. Volcker decided the Fed needed to control the money supply. In controlling bank reserves and deposits, the Fed could be giving up on controlling interest rates.

In addition to targeting the money supply, the Fed increased the discount rate to 12 percent. Banks were required to set aside more of their deposits as reserves, end lending for speculative activities and commit to restrain growth in the money supply whatever the implications might be for interest rates.

They knew the immediate reaction would be higher market interest rates that rose even beyond “upper limits” set by the Fed. The three-month Treasury bill eventually exceeded 17% and the bank prime lending rate surpassed 21.5%. Mortgage rates surpassed 18%. We had never seen rates like that before in our financial history.

At a luncheon, Volcker heard from the CEO of one unnamed company who “happily agreed to wage increases of 13 percent annually over each of the next three years” with his union workforce. Volcker wondered if that business stayed in business.

Everybody complained. Farmers, politicians, business owners, homebuyers. Marches were held. By December 1980, Volcker had to agree to personal security escort protection. His speeches were interrupted by screaming protestors.

Carter lost to Reagan in the election. Inflation was only one issue that cost Carter a second term. In the beginning of 1981, the long-expected recession arrived in full force. This is when the Rust Belt got its name due to all the manufacturing plant closures. In August 1981, one more contribution to the fight against inflation occurred. Reagan fired thousands of air traffic controllers when they went on strike over wages. Reagan warned them against the strike. They went on strike anyway. He fired them. The world noticed.

By the Spring of 1982, unemployment had reached a postwar record. But, even though inflation had dropped some, the money supply still remained well above Fed’s target. “Fifteen percent interest rates and money supply still high?” They stuck with the program.

Finally, in the summer of 1982, it became clear that inflation was finally falling well down into the single digits. In July 1982, the Fed lowered the discount rate three times in a four-week period.

The worst was over and the markets took off on a run that lasted until 2000 with a major speed bump in 1987 (induced by Fed rate increases).

By the end of 1982, inflation had dropped all the way to 4 percent. Unemployment was still at ten percent. But a recovery had begun.

Source of inflation data:

S&P 500 data:, Historical data

Past performance is no guarantee of future results. An investor cannot directly invest in an index. All data are from sources deemed reliance but cannot be guaranteed. This information is for discussion purposes only and is not intended to be direct invest advice.


Be Rational

Block the Noise from Your Investment Plan

And there is a lot of noise.

Covid-19 pandemic, Presidential elections, Supreme Court nomination, uncertainty about a next stimulus, re-opening or shutdown, work at home or go to the office, state and local elections, protests, riots, socialism vs. free market, inequality vs. fairness, climate change. There are a lot of emotional issues facing the nation.

Add to those real issues the emotional issues investors face.

  • Loss aversion
  • Anchoring
  • Recency
  • Availability

Loss aversion and anchoring. These are two behavioral biases we all have, and they are hard to overcome. We are emotional and not always rational.

Loss aversion means that losses feels more than twice as bad as a gain feel good. If a gain feels like a 10, a loss feels like -25.1 Loss aversion can cause you to sell a perfectly good asset in order to avoid the pain of a temporary, short-term paper loss.

Anchoring works a bit different.

Markets hit a high in early September and many people have “anchored” on the amount in their account as of then. Their accounts are lower now by, for simplicity, say 7%. Add to this the worry about the events coming up. They don’t want any more “losses” (they don’t want to see their account values decline). They are almost ignoring the possibility of further gains – short-term or long-term.

Practically speaking, they haven’t had any losses – only on paper.

Why not just sell high and buy low, right? If an investor sells, when will they reinvest? And will they reinvest at a higher or lower price that what they sold at? Will the market cooperate? What if the market rises?

My experience is that the bailing investor will get back in the market at a higher price. They will keep waiting until things are clearer, more certain. The problem is, things rarely are clear or certain. Only in hindsight are things clear.

Recency and Availability are two more biases we all have that affect our decision-making processes (and not in a good way).

Our ability to make mistakes is influenced when we listen to the news (which is generally negative). What we hear or see most easily and most recently affects our beliefs and our decision making. And for your investments, that is usually not good news.

What can people do? Stick to their plan. Get help.

How does an advisor help? A solid grasp of history helps. I have been through numerous market swoons (1987, 1990, 2000, 2008-09, 2011, 2018, 2020) during the last 30+ years. The data is clear. Despite all the social, political and economic upheaval of the past 74 years, the declines have all been temporary (see The Bear Market Chart below). Reacting on emotion will probably cost you money. Sticking your plan can save your retirement fund.

Let’s get some perspective. What was the S&P 500 Index the day before The Crash in October 1987?

On October 18, 1987 the S&P 500 index closed at 282.70. (On October 19,1987 the index closed at 224.84, a drop of 20% in a day).

As I write this, after a 6% drawdown since September 2, 2020, the index is at 3351.60 (9/28/20 close).2

The average annual growth rate of the index since October 18, 1987 is just about 7.8% (excluding dividends). So, despite a 20% one-day collapse and the seven other significant markets declines3 since then, the S&P 500 Index is up 1,085 percent since October 1987.

To put that in real dollars, if you had $10,000 invested in the S&P 500 index in 1987, adding no further investment to that amount, you would have $108,500 today. Not bad. Had you reinvested the dividends (2% annually assumed), the amount would increase to around $218,000. Nice.

Remember, the real financial risk in retirement is running out of money…not the fluctuation in stock prices (a.k.a. volatility) in the market now.

What about investing in bonds? For the foreseeable future, bonds won’t be paying very much at all. In fact, you may well experience annual purchasing power loss. After-tax, after-inflation yields, may be negative in some cases. And when interest rates rise, the principal value of bonds will decline.

Is it not rational to filter the noise, stick to your plan… and own equities?


The opinions expressed are those of Michael Magnuson and not necessarily those of Lincoln Financial Advisors Corp.

1 Thinking, Fast and Slow, Daniel Kahneman p. 284.
2 S&P 500 Index values obtained at
3 The Bear Market Chart

Volatility Fatigue

April 2, 2020

Here is a story I recount to people. It reinforces what to do and not do with your investments.

There was a couple, let’s call them the Jones’, who owned a portfolio of 50% equity mutual funds and 50% bonds. This couple and their portfolio had endured the tech boom and bust, the 9/11 attacks and the market declines from the accounting scandals. They then profited from the market rise from 2003 to 2007.

Their confidence was shattered in 2008 when Lehman Bros collapsed. They suffered a $75,000 loss on a Lehman Bros bond. (Not an equity fund – a bond.)

Having suffered that bond loss and now having much less confidence in the financial system, they nonetheless continued to hold their mutual funds.

If you recall, the Financial Crisis market bottom occurred on March 9, 2009. By continuing to hold their portfolio, they began to participate in the markets inexorable rise. And they held their funds until May 2010. The “flash crash” happened on May 10, 2010 and on May 20, the couple told their financial advisor to sell the last of their equity mutual funds.

They just couldn’t take the volatility anymore. Volatility fatigue had set in. They could not diffuse it. So, they bailed. And for a while they probably felt some comfort. They had sold. The volatility was gone – there was less to worry about.

I wonder how long it was before they started noticing the equity market rising… and rising. At some point, I suspect they began to experience regret for something they did but later wished they had not done.

So, to recap, they held during the bust, 9/11, 2001 -2003 – the tough times, they held through the Financial Crisis to the bottom, held through the early part of the recovery and were scared out of the market by a one hour – ephemeral – market disruption.

Since May 20, the “market” – let’s use the S&P 500 index as the proxy – has risen from 1071.59 (let’s just round it to 1072) to yesterday’s (4/1/20) closing amount of 2470. That’s a 130% increase in value (without counting dividends).

That’s an average annual return of about 8.8% - again, not counting dividends. Throw in 2% for dividends (again rounding) and you get 10.8%

And this 10.8% is after the market has done a power dive from 3386 on February 19, 2020 to the present 2470 – a 27% decline in just about 30 days. The fastest market decline … ever.

What did the family earn in their bond holdings and CD’s since 2010? There is no way of knowing (without asking them). But if they had a diversified portfolio of bonds since then, it is possible that they may have earned about 3.85%.1

So, 10.8% vs. 3.8% over 10 years. That makes quite a difference in your retirement spending.

Markets are volatile, especially now. People who hang in there, avoiding the emotional pull to “do something” because “this time is different” or “I just can’t take it anymore” typically have a much higher probability of avoiding regret than those that panic and bail. Remember, markets can be volatile to the upside, too.

Opinions expressed are those of Michael Magnuson and not necessarily those of Lincoln Financial Advisors.

This story is hypothetical and for illustrative purposes. It is not indicative of any particular investment or performance and actual results may be different. Diversification may help reduce but cannot eliminate risk of investment losses. There is no guarantee that by assuming more risk, you will achieve higher returns.

S&P 500 index data from The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock's weight in the index proportionate to its market value. Past performance isn’t indicative of future performance. An index is unmanaged, and one cannot invest directly in an index.

2 Source: Wall Street Journal, July 12, 2010, “Investors Flee Stocks, Changing Market Dynamics”



January 22, 2020

To amend the Internal Revenue Code of 1986 to encourage retirement savings, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,


a. Short Title.—This Act may be cited as the “Setting Every Community Up for Retirement Enhancement Act of 2019.

The SECURE Act was signed into law on December 20, 2019 as part of the Further Consolidated Appropriations Act, 2020, H.R. 1865.