So, What’s Your Plan for The Bear Market?
A lot of people are stressed out about a lot of things right now. Markets are down. Prices are up for many of the things you need to buy. Interest rates are rising and make it a confusing time to consider buying or selling a house, or making other major financial decisions. This all adds to the stress you may be feeling about your job, the ongoing pandemic, and the health of loved ones.
If you’re stressed out about what is happening right now in the stock market, there is a better way to invest.
This isn’t about a way to guarantee you a higher return. (For the record, if anyone guarantees you a higher return, stop reading that article or end that Zoom call, and walk away). This is about having a plan for how you invest. It should prepare you for times like this when the market quickly falls. It should also prepare you for when the market quickly goes up (like it did right after the pandemic started). It should be a plan that lets you stay invested for the long term.
But this plan is not the same for everyone because each of us is in a different situation. Different people can stomach different amounts of risk. That’s based on what our goals are, how our brains are wired, and what we have lived through. Everyone is different.
Yet everyone faces the same ups and downs in the public markets. So, what’s your plan?
- First, answer the question, “Why are you investing?” It’s not a plan if there aren’t goals. If you want to retire in 30 years, you may be able to bear more risk in order to maximize the growth of your portfolio than you would if you hope to retire in three years. Our clients have a detailed, comprehensive plan financial centered on their goals.
- Then, determine what balance of bonds and relatively more risky stocks helps you reach your goals and is comfortable for you. If you have too much in bonds too soon, you may feel better when markets go down but you may be compromising your goals. Likewise, if you have too little in bonds later, you may feel better when markets go up but you may have to sell stocks at a loss to fund your goals during a bear market. Our clients have a specific allocation to bonds and stocks based on the scope and timing of their goals.
- Focus on controlling the things that are in your control – like saving more, spending less, maintaining your investment plan – and don’t be frustrated by trying to control things that are not in your control – like a bear stock market, rising interest rates, and high inflation.
If you find yourself tempted to make a change, think carefully about whether you’re moving from one long-term plan to the next long-term plan, or from a long-term plan to a short-term emotional reaction. Trying to time short-term moves has more in common with gambling than with long-term investing plans.
When I look back over my past 35+ years as an adviser and investor, I can make a long list of all the shocks that made markets go down. High inflation, rising mortgage rates, bad fiscal and monetary policy, recession, wars and threats from foreign enemies, natural disasters – we’ve seen all these before.
We have to accept that these shocks will happen and we can’t control them. We should prepare for them rather than try to predict them. This time there is inflation, a recession, Russia’s war in Ukraine, and increased volatility. We don’t know when this will end. We also won’t know exactly what will cause the next shock or when it will occur. The only thing I can guarantee is that it’s going to be a surprise (because if it weren’t, the market would have priced that in).
As a long-term investor, here’s the good news: You can capture the returns of the market without having to accurately forecast (which is great, since almost no one is consistently good at that). So, in times like this, when stock prices go down, the market is setting prices so shares will have a better return and attract buyers. When you see a big drop, prices are lower so that, going forward, the people who buy have a greater chance of having a positive outcome.
That doesn’t feel great if you bought Netflix in the last couple years, but that’s why I don’t encourage people to buy individual stocks. I love that people can easily diversify and spread out their risk by owning index-based mutual funds and ETFs.
When you can be a long-term investor and think in terms of decades rather than years, you have the greatest chance of capturing the power of compounding. Those little extra gains add up over time. It helps explain why over the past 95 years (including all those shocks that have happened), the return for the general stock market has been around 10% a year.1 Markets rarely return 10% in any one year, but over time, long-term investors have been rewarded with that longer-term average. I think that’s amazing.
But I also know it’s tough to stick it out. To earn that long-term return, it means that you have to stay invested through these tough times, even when the market has gone down and down. The market will turn around and it often turns around quickly and before we expect it. Long-term investors are fully positioned to earn the positive returns when the market turns around.
I don’t like to tell people what to do but I do want to help. I know how stressful this can be. It is my hope that, by sharing my perspective, I can help people have the greatest chance of meeting their goals by being diversified, long-term investors. Right now is tough for many people. But I have seen over my career how many people have benefited from creating a plan that made sense to them and that they could stick with. It’s not always easy, but it’s the best option I know of.
And it’s never too late.
So, what’s your plan?
If you need a goals-based, comprehensive plan, please reach out to us here at Oasis Wealth Planning Advisors.
1 In US dollars. S&P 500 Index annual returns 1926–2021. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.