The Financial Equation: Bear Markets … Time to Panic?
President Trump’s handling of both trade issues and the fed interest-rate hikes has caused some market volatility, and many world stock markets have either fallen into or are close to hitting bear market territory (declines of more than 20 percent from the high). Because of this, you’ve probably felt some degree of heightened volatility in your portfolio. Should you panic and sell all your investments? Most often the answer to that question is no. What most people should be worried about is how this volatility affects their portfolios and financial plans for the long term (not the short term).
For most people who are in their 20s, 30s, 40s and early 50s or have at least 10 or more years to accumulate assets toward their goals, you probably have very little to worry about in regards to the latest financial turmoil. In fact, it will probably give you an opportunity to buy some discounted investments, thereby helping your portfolio grow more down the line. So be ready with any extra cash you may have to invest in bargains and/or possibly sell off certain investments that may no longer make sense to hold in your portfolio (for example, end of year tax-loss harvesting to erase any big portfolio gains).
For those closing in on or already in retirement (in your mid-50s, 60s and older) or those who have less than 10 years to accumulate assets toward their goals, you may be a bit more concerned about how this recent market turmoil may affect you (and understandably so). However, let’s highlight some statistics that may make you re-think your worries – and stop you from worrying too much.
Market Corrections are Normal
In the U.S. markets, we average a 10 percent correction once a year, and we just had one in early 2018 (S&P 500 was down 10.3 percent), so we’ve just experienced two pullbacks in 2018. Bear markets occur every 3-½ years, and we’ve been more than due for one (the last U.S. bear market ended in the first quarter of 2009).
Bear Markets Have Been Shorter Than Bull Markets, Historically
On average, bear markets last 16 months, and the average cumulative loss is 41 percent. Bull markets, on average, last 9.1 years with an average cumulative gain of 476 percent.
Market Movements are Random in the Short Term and Predictable in the Long Term
Try this exercise: For the next 15 business days (three weeks), try to predict where the markets are going to go the following day. To keep it simple, all you have to do is predict whether it will go up or down (you need not worry about how much). The chance of you getting all 15 days right is less than 1 in 33,000. To put this in perspective, you have a higher chance (1 in 9,000) that the Earth will be struck by a huge meteor during your lifetime.
Anticipate Better Days
The effects of corrections don’t last long. After a drop of 10 percent to 20 percent, it typically takes just four months to break even. Also, a severe bear market tends to be followed by a sharp bull market rebound. Each time these stocks dropped more than 40 percent, they rebounded by more than 33 percent during the first year of the comeback.
So, What Should You Take Away From These Points?
If you can remain patient (and not panic) and put more money to work in quality investments after the markets pull back by more than 10 percent, and if you can maintain a long-term investment perspective, historically, that has greatly helped investors reach their financial goals. After all, we’ve all heard of the sayings, “buy low, sell high” and “buy on the dips.” Unfortunately, most investors do the exact opposite, and that’s where they cost themselves.
Don’t be in that group that makes emotional investment decisions – especially now that you’re armed with this knowledge. Take advantage of this information and of your financial situation. (You’re welcome!)
You should also make sure you find an experienced financial advisor who regularly advises clients to not panic during volatile markets. You should find a financial advisor who works for an RIA firm, earns his/her money from fees (not commissions), believes in having an abundance of investment choices for clients and has the heart and demeanor of a teacher (not a salesman). Once you’ve found this financial advisor, chances are you’ve found the right financial advisor to help you prepare and plan for your financial goals.
To learn more about Martin Federici, view his Paladin Registry research report.
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