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Recessions, wars, pandemics, elections, interest rates...stuff happens. And as a result, stocks can go lower for a period of time. Welcome to the stock market, where investors can experience strong historical returns, assuming they can survive the periods of anguish that often appear. Reward cannot exist without some form of risk. Understanding these truths today will better prepare you for the next market drop in the future.
Before we discuss survival tools, let's define a "Bear Market". Stock market declines come in various shapes and sizes. Here are some commonly used terms used to describe them:
A pullback refers to a decline of 5% or more.
A correction refers to a decline of 10% or more.
A bear market refers to a decline of 20% or more.
Downward moves are normal. Like a common cold, they're annoying but certainly not surprising. And every so often your cold turns into the flu, which takes a little longer to recover from. These moves are considered normal market behavior, as they frequently occur. Here's a look at how often they tend to happen:
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For perspective, there have been a total of 12 bear markets since 1950.
While it's completely normal for the market to drop, it doesn't mean it's not worth holding. Investing in stocks is often equated to gambling, which couldn't be further from the truth.
Take a look at the last 10 years; stocks made money in 8 out of 10 years. We also survived 2 bear markets and many other smaller dips along the way.
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And if you zoom out even further, the numbers are relatively similar. Stocks have made money during 17 of the last 20 years.
Investing is NOT gambling...if gamblers could make money at this rate, Las Vegas would go out of business. Stocks are not a 50/50 proposition. Investors will not "lose it all" in the S&P 500.
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How much stock do you own? When are you retiring? How much income do you expect from your investments? What type of portfolio loss can you financially withstand?
Proper investing utilizes diversification across various investment vehicles based upon your very unique circumstances.
It's my belief that portfolio allocations are deeply personal, and big-picture financial planning can guide investors towards a harmonious strategy.
Stocks carry higher risk with the goal of long-term appreciation (as evidenced in the charts above). So your percentage of dollars allocated to stocks should carry a longer time horizon.
Bonds typically buffer stock market risk while offering a more conservative rate of return (although 2022 was an anomaly). Money you plan to use in the next 3-5 years can make sense for this category.
Cash holdings, including money market & CD's, are designed for short-term liquidity needs. And in my opinion, cash is not an investment strategy.
Work with an advisor to help identify your blind spots. Spend time understanding the risks within your own portfolio. Determining your investment strategy should be based upon your objectives and backed by research, not your gut feelings!
What's the best investment strategy? The best strategy is the one you can stick with during both good and bad markets. Of course, ongoing adjustments are necessary as life progresses. The dog who chases his tail becomes exhausted, while effectively going nowhere...
I'll save you some time...the headlines will read "Stocks Get Crushed", "Imminent Market Crash", or "Markets in Turmoil". Bad news gets the most clicks...
Even your wealthy neighbor will tell you, "But this time, it's different..."
Spoiler Alert: This time is not different. The market will drop, the news will claim the world is ending, and a rocket ship rebound will eventually ensue. It's been this way for 100 years. Human behavior remains the same.
BONUS TIP: Check your balances less during times of chaos. Logging into your accounts incessentantly will only increase your odds of making an emotionally-charged decision. "Getting out of stocks until things calm down" is far more dangerous than one can imagine. There will never be an "all clear" signal to get back in the market.
Think back to 2020 & 2022. Both were very painful periods for stock investors. But the subsequent rebounds clearly proved that staying invested was by far the best course of action. Panic selling may alleviate the pain for a week or two, but the long-term consequences can be devasting.
To be a successful stock investor, you must allow contradicting statements to be true at the same time:
No one can tell you exactly when stocks will get clobbered, so simply accepting that it will eventually happen on the path to higher levels is critical. Experience is the ultimate teacher. Every down market an investor survives, the more prepared they will be for the next one!
Tune out the noise, trust the process, and always be compounding!
Important Disclaimer: The information provided in this guide is for educational purposes only. Nothing here within should be considered investment or tax advice. Please consult with a financial advisor and/or CPA when considering investment and tax decisions.
We generally serve families with $500k or more in retirement/investment assets. Our clients are seeking a trusted advisor to oversee investment decisions and retirement planning. Schedule a meeting to explore our services:
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