Broker Check

When Bad Things Happen to Good Investors

| August 30, 2019
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Something looms in your future that you'd prefer to avoid, but can't.

It may be a colonoscopy or a root canal, a visit from that cousin you don't care for, or an estimated tax payment (next one is due on September 15th by the way). Something is coming that you're not anxious to experience.

But because you're a mature adult, and you know it will pass, you don't dwell on it. You don't let it obscure the many other more pleasurable aspects of life.

Remember all this when we suffer the next significant market correction.

You know it's coming. History tells us on average we have a bear market, defined as a 20% or greater decline from a previous peak, every five years. And while the correction we went through last fall approached the 20% mark, we recovered quickly. Most observers do not consider it to have been a bear market.

We don't know when the next bear market will hit. U.S. stocks are near all-time highs, but many investors are nervous. Tariff talk and threats make many nervous. There are signs growth in the global economy is slowing, business investment is declining, and consumers may begin to cut back. The economy tends to go in cycles. After a long, slow-but-persistent recovery from the worldwide recession of 2008-2009, we may be due for a shallow recession, and with that, a bear market may emerge.

So, when it hits, how will you handle it?  (Or better, how will you handle yourself when your portfolio falls in value?) We have four suggestions:

  1. Be prepared—financially. If you need cash over the next 12 to 24 months, make sure there's a portion of your portfolio that's accessible without having to sell assets in a downturn. Purchased money market funds, short-term bond funds, savings accounts, and cash all retain their value or almost all even when the stock market takes a hit. A diversified portfolio is also likely not to decline by as much as the U.S. stock market. A well-designed portfolio already incorporates the possibility of bear markets in how it's allocated and its underlying return assumptions.

  2. Be prepared—emotionally. Mentally, remind yourself that corrections and bear markets are an expected aspect of investing. Remember that the historic trend line we've all seen of rising stock prices over many years is jagged, not straight. Markets don't go up smoothly all the time. We'll have a bear market, but we'll get through it.

  3. Recognize that bear markets can be healthy for investors over time. Market corrections drive out speculators. Stocks reprice at more reasonable levels. Those with cash to invest find a great opportunity to buy stocks at relatively inexpensive prices. A down market could present the right opportunity to add to your stock allocation.

  4. Focus on the long-term. Those who fixate over short-term movements in the market often try to get out at the peak and get back into the market at the bottom. History and experience suggest that's hard to do, and the cost of mistiming exits and entrances can be high.

    Instead of focusing on the short-term, recognize that over the 61-year period 1957 through 2018, the average bear market has lasted about 12 months, dropping on average about 34%. But the average bull market has lasted 55 months and produced an average gain of 154%.1

You're planning on surviving that colonoscopy or that visit from your annoying cousin. Make plans now to handle the next inevitable bear market with the same degree of equanimity. And if you need some help preparing for it, give us a call. We can help you "bear up" through it.

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1https://www.invesco.com/static/us/investors/contentdetail?contentId=049233173f5c3510VgnVCM100000c2f1bf0aRCRD

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