Although most of you have successfully managed bear markets with us in the past, it has been some time since our portfolios have declined along with falling stocks in such a way to cause us too much angst. Now certainly seems like a good time to share some information that should help you “weather the storm” and remain focused on your financial goals.
As of the writing of this blog (Dec 26, 2018) we have officially entered bear markets in small company stocks, developed and emerging international markets and mostly U.S. technology stocks that represent the NASDAQ 100 Index (as defined by declines of at least 20% from previous highs). The end of today very well may bring us into bear market territory with broader indices like the S & P 500. Even though our portfolios are extremely well diversified, significant declines across all markets have certainly had a noticeable effect (diversification offers no guarantees of avoiding temporary losses – especially during broad declines across all asset classes). Additionally, the pace of the bear market has been somewhat surprising, although far from unprecedented. Markets have fallen from highs from just three months ago and the S & P 500 is down over 10% since December 1st (source Morningstar).
Reasons for significant market declines vary although, in our opinion, most center-around a combination of higher interest rates, global/political uncertainty and the anticipation of lower corporate profits. All three may be in play here as well. However, acknowledging what may be causing current market conditions is not necessarily meaningful regarding subsequent actions that should be taken. As you know, market-timing (predicting short market swings and making portfolio changes on that basis) is not a “strategy” that we have ever promoted. Short-term market sentiment can be severe, and trying to avoid temporary losses inevitably lead to greatly reduced long-term returns since market recoveries tend to be just as “severe” and even less “predictable.” In the 80 years from 1934 – 2014, as measured by the calendar year, the S&P 500 stock Index has suffered total return losses of at least 20% in four different years, the most recent was 2008’s 37.0% decline. In the year after the three previous 20%+ tumbles, the index gained an average of +32% (source: AAII Journal). Although emotionally it may be difficult to withstand these temporary losses, our experience confirms that investors have to be willing to stay invested in the market during the down times to participate in the next recovery. Below is a great example that illustrates how public and media sentiment during bear markets can derail the patience necessary to participate in subsequent recoveries. When this Time Magazine issue hit the newsstands on March 9, 2009, the S & P 500 Index hit its bear market low – the index went up 100% during the following 48 months with some of the most significant gains achieved within weeks after the March 9th lows (source: Barrons).
Although the amount of time it takes markets to fully recover has varied, your portfolio is designed specifically with this in mind. For those who are retired or are quickly approaching retirement, significant assets (generally 40% of more) are allocated in non-equity/stock fund positions that can be relied on to produce income during difficult markets. This allows us to avoid liquidating too much from the stock fund side of the portfolio and provides considerable time for share prices to recover. For those who are in a growth and savings mode with greater equity fund exposure (and more time before retirement income is needed), falling markets should be viewed as “buying opportunities” in our opinion. It’s always better to buy when things are “on sale” and prices are lower; albeit we acknowledge this can be less comfortable than when things are going well. The following chart illustrates previous significant market declines and recovery times.
In the face of all market conditions, your retirement plan “foundation” should be the glue that holds your investment strategy together. Our ongoing comprehensive reviews help us identify the income and growth requirements vital to achieving your financial goals. Bear markets are normal and expected occurrences, and are necessary stumbling blocks along the path of achieving that success. If market risk (volatility) in equity investing didn’t exist, the long-term growth needed to achieve ongoing spending goals in the face of inflation would not be possible. Of course we realize that weathering a bear market storm is always unnerving to varying degrees. Regardless of when your latest comprehensive review was completed, we are always available to review things again in light of current conditions and concerns. Please do not hesitate to reach out to schedule a review or simply to set aside some time to talk about the markets or your portfolio in more detail.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Financial, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Kestra Financial is the parent company of Kestra Investment Services, LLC, member FINRA/SIPC and of Kestra Advisory Services, LLC.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Kestra Financial LLC as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The indices mentioned are unmanaged and cannot be directly invested into. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market. The Dow Industrial Average is an unmanaged index of 30 stocks.
If you do not want to receive further editions of this weekly newsletter, please e-mail me at firstname.lastname@example.org.