Financial Legacy: 4 things you should know if this is the beginning of a bear market?
Paradiem is built on helping families create legacies that are built to last! Part of your financial legacy will include your investments, and if you’ve been paying attention to the stock market, the last two months have not been fun. By definition, we are currently experiencing a correction. A correction is defined as a drop in the market of over 10% but not more than 20%. When it drops by more than 20% it is considered a bear market. Just as a reminder: corrections are common. They happen about once a year, and the average drop is 14%. Even still, over 75% of the last 38 years have resulted in positive returns.[1]
I have no idea what is going to happen next, but I thought it would be worth going through the exercise of asking the hard question: “What if this is the beginning of a bear market?” To be honest, I see a lot of reasons why I think this is just a regular and normal correction. However, no one knows what’s going to happen. So, I thought I would take us through the exercise, and like the Boy Scouts we can “be prepared.”
Here are 4 things everyone should know:
- It will hurt – at least temporarily. A loss of 20% or more, no matter how temporary is never fun. The media already has everyone on edge and we haven’t even hit more than an average intra-year correction. Can you imagine how loud they will be screaming if we see a drop into bear market territory? Guess what? No matter how loud they scream, they have no idea when it’s going to end. Out of the last 7 bear markets, 4 of them stopped dropping within 4 months.[2] The desire in the pit of your stomach is to do something. My best advice is to do nothing related to your investments. Turn off the television, and stop opening your statements, if necessary. Focus on the things that matter, like family and relationships. All of this is important because….
- We are ready for this. – All of the money you have invested in the markets should be money you don’t need for 5 years or longer. What happens over a temporary time period should have no bearing on your need for this money over the next 5 years. We have a plan to keep all the money you might need over this time period in cash and short-term bonds. And when it comes to the money we do have in stocks, this is part of what we signed up for. Investing in stocks means being willing to accept volatility. We love volatility when the market is going up but hate it when it’s going down. Unfortunately, although the long-term trend of investing is up, there are frequent temporary drops that test the will of everyone. Having the ability to think long-term and ignore the short-term volatility is important because….
- If history is any guide, it will end. – As I stated above, of the last 7 bear markets, 4 of them stopped dropping within 4 months. One of the challenges of surviving the temporary drop is the noise coming from the media that leaves you to believe there is no end in sight. You feel the need to change something. But if you make a change, you are forcing yourself into two decisions: first a decision to get out, and then you must decide when to get back in. I have yet to meet an investor who improved their situation by getting out and getting back in. The emotion that got them out typically keeps them out longer than they wanted. What most of us lose sight of is the fact that….
- History tells us it will recover – probably faster than we anticipated. When you look across the history of bear markets the average time for bear market to make a full recovery is 40 months.[3] That’s just over 3 years. Remember when we said we were prepared for this with 5 years’ worth of cash on hand? Good news: 5 is greater than 3, so we have time to wait out the recovery before we need to sell any stocks to meet our cash need. Most investors are surprised when I tell them about the 40 months and believe it takes much longer.
Our life and our legacy are more than a temporary market drop. As we head into the Thanksgiving holiday, don’t let the noise of what you can’t control override the opportunity to speak love, compassion and vision over those closest to us. No matter what happens, our long-term legacy will be made up of more than our investments. And more than likely, when you look back over the next 5 to 10 years, you will remember more about the conversation you had around the turkey than whatever distraction of the minute the news channels are blaring on the television. These moments with family are precious. Embrace them!
[1] JP Morgan Guide to the Markets, Page 14 October 31, 2018
[2] The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may be invested into directly.
[3] 40 Months to recovery – “Bear markets may not be as ferocious as they appear”, Mark Hulbert, Wall Street Journal, March 8-9, 2014.