Watching the stock market erase recent portfolio gains is deeply frustrating, both for investors and advisors. When pullbacks occur, which they do frequently, investors become understandably concerned. When declines continue into the territory of Market Corrections (10% lower than recent highs), and occasionally into Bear Market Territory (20% retreat from recent highs), investors’ emotions can outweigh their logic and common sense.

However annoying and scary bad times become, riding out the storm is the safest process to follow. Unless, of course, your funds aren’t long-term investments with a time horizon of at least five years. Money exposed to extreme market volatility needs at least that amount of time to ameliorate risk.

Investors with dollars intended for near-term expenses or purchases need to find alternative, less volatile investment vehicles. Money Market Mutual Funds, ultra-short-term bond funds, Certificates of Deposit (CDs), and other lower-risk vehicles can protect principal while providing at least a modest return. Even yields below the rate of inflation are preferable to incurring short-term loss of needed principal through stock market volatility.

Human behavior is reasonably predictable, at least when large populations are being studied. During bad stock market years, there are observable trends. In prolonged downturns, selling activity accelerates among individual investors. As frustration grows, investors inch ever closer to making bad decisions. The final (and predictable) phase of a long, harsh down market is called Capitulation, and is observable when panic selling reaches its zenith. Many people simply take their ball and go home.

Predictably, shortly after Capitulation, institutional and other high-volume buyers emerge. Market recovery begins and quickly drives up prices, leaving shell-shocked investors behind. Watching reduced (and/or destroyed) account balances suspended in time, many investors will be afraid to re-enter the market until the recovery is mature. Assets sold during Capitulation are no longer recoverable at their selling prices, and the financial futures of many individuals and families suffer long-term impairment.

History and logic provide clear guidelines for long-term investing success. Unfortunately, human emotions run the gamut in stressful market conditions. In our financial advising business, we have been faced with pullbacks, corrections, and Bear Markets. Our job is to control panic activity (if possible).

Clients of qualified advisors tend to avoid Capitulation, though a degree of frustration is unavoidable. We can help avoid Capitulation disaster.