With so much uncertainty facing the US economy, and the world, it is easy to let fear dominate investment decisions. When the market falls 30% in one month it’s natural to panic and become short-sighted in your investment decisions. But with a few good disciplines, proper planning, and a little patience you can maintain a long-term perspective during uncertain times. Want to know how you can do it? Here are a few things to consider:
1. Bear markets are normal… and can be beneficial
Why do retailers have huge sales during the holidays? Because people buy when products are cheap. You should approach the markets in the same way. Bear markets offer investors great buying opportunities because investments are at a discount. Taking advantage of these deals can significantly boost the growth of your portfolio.
2. Remember, markets recover
History has repeatedly proven that markets bounce back. The average bear market has lasted a little under a year and a half, delivering an average cumulative loss of 39%. In the S&P 500, there have been 23 corrections since 1945 and 12 bear markets, not including the current bear market. That works out to corrections becoming bear markets a little less than 35% of the time.1 The longest recorded bear market was in 1942 and lasted little more than two years but was followed by a nearly five-year bull run. You can look at it another way—almost 70% of the time the markets are bullish.
3. Stay diversified
Having a well-diversified portfolio can help cushion the fall. Not every company, sector or country is affected by market downturns in the same way. There are certain parts of the market that get hit harder than others and it is extremely difficult, if not impossible, to predict which ones will perform better. Spreading risk across asset classes that move at different times and speed are essential to reducing your risk exposure.
4. Don't miss the rebound
It was easy to say that you liked risk when the market was at an all-time high but how did you react in this latest downturn when the market dropped 30% in one month? In 2008, many investors didn’t stay disciplined and sold at the market bottom in March 2009, turning paper losses into real losses that devoured significant amounts of their wealth. Conversely, investors who bought at the bottom or stayed invested benefitted from the strongest bull market in history. According to Schwab Center for Financial Research2, an all-stock portfolio was the best performing portfolio and delivered 83% return three years after the market bottomed. Since no one can time the markets, the best decision was to stay invested and have cash reserves ready for buying opportunities.
5. Always have cash
While cash has the lowest return of any asset class it plays a key role in your portfolio’s allocation. Cash has a low correlation to other assets and can offer protection during times of volatility. It also comes in handy during down markets. Buying assets at low prices is always attractive and when you have cash to do it you don’t have to sell other investments at a loss to take advantage of the buying opportunity. This provides stability and more growth long-term.
6. Have a strong financial plan
When markets become volatile and your portfolio isn’t looking good on paper it is important to remember why you are invested. Having a road map allows you to stay focused and remember that you are in this for the long haul. When you have worked with your financial advisor to develop a plan structured around your personal needs and goals you can sleep well at night knowing that these temporary bumps are, in the words of Joker, “…all part of the plan”.
7. Find a financial advisor you can count on
As the saying goes, two are better than one. A good financial advisor will offer you six key things: 1) Organization. We will help you bring order to your financial life, 2) Accountability. We will help you follow through on financial commitments, 3) Objectivity. We bring insight from the outside to help you avoid emotionally driven decisions, 4) Proactivity. We work with you to anticipate your life transitions, 5) Education. We will explore what specific knowledge is needed to help you succeed, and 6) Partnership. We attempt to help you achieve the best life possible and work with you, not just for you, to make that possible.
1 Information retrieved on 4/21/2020 by Seth Bergen, CFP® from https://apnews.com/84ee301c404539d8731da34128330752
2 Information retrieved on 4/21/2020 by Seth Bergen, CFP® from https://www.schwab.com/resource-center/insights/content/bear-market-investing
Investing involves risk. Past performance is not a guarantee of future results. Historical data is provided for illustrative purposes. Each individual has a unique situation and should speak with a financial professional before taking action. This content is provided for educational purposes and is not investment advice.