Boy, have the last 10 years been good! Since the S&P 500 bottomed out on March 9, 2009, it has averaged 17.4% annually. To put that into perspective, the S&P 500, which is an index that tracks the performance of the 500ish (there's currently 505) largest U.S. companies, has delivered 10% average annual returns since 1926.
While markets tend to rise over time, these bull markets do get interrupted by bear markets, which is a drop of 20% or more. We’ve all seen what it looks like when the market decides to turn, such as in 2000 and 2008, and I think we can all agree it is not pretty.
We can certainly discuss current market dynamics, as well as preceding bear market indicators, such as the yield curve inversion, but there is no guarantee of when it will come anyway. Plus, this isn’t the forum for that. I’m trying to keep my dear friends awake while reading this post.
BUT – For arguments sake, let’s assume a bear market hits over the next couple of years. Is there something I should do now to prepare since we’ve been on such a strong run? Should I change my portfolio or move to cash once I see the market begin to turn?
I have a few answers that may help.
Importance of Goals
This is a great time to revisit your financial plan. Now, it doesn’t have to be in a cute 3-ring binder with your name highlighted on the top. Your financial plan can be as basic as a piece of paper with your assets and goals listed. I do recommend it be written or typed though, as to hold yourself accountable.
Each account you have should serve a purpose. Short term cash accounts to long term retirement accounts, and everywhere in between. This avoids the rash and emotional move out of the market when times get tough.
So, whats a girl to do?
- Take inventory. Make sure the accounts that you have invested are well diversified and the risk you are taking is appropriate for the goal. If you have an investment account earmarked for your 1st home purchase in 6 months, you shouldn’t be fully invested in stocks. It is too risky for the time period. You should have 3-6 months' work of expenses in your emergency fund sitting in cash. This will make sure you are liquid enough if a need should arise swiftly.
How about my retirement account? Don’t touch it. To be honest, don’t even look at it. Just keep contributing and make sure it is well diversified. Unless you are retiring over the next year or two, I wouldn't even adjust the portfolio because whatever decline occurs will recover before you know it. It took about 5 years for the 2008 bear market to fully recover, but you will also be contributing and purchasing shares at a discount on its way back up. Point #3 below explains that a bit more.
- Stay invested. If you can’t weather a market downturn then you shouldn’t be invested in the first place. It can be difficult to watch your portfolio value shrink and not do anything about it. I get it. But, the difficulty with selling your investments and moving to cash is that you need to be correct twice.
Yes, twice. You need to know the exact time to get out of the market and also the exact time to get back into the market. That might be the hardest possible thing to do when it comes to market timing. Not even the best money managers in the world get this right. Solution? Don't even try it, just stay invested. Besides, unless you sell, you haven't actually lost any money. It is only a temporary reduction in value.
- Buy more. It is difficult from an emotional perspective not to sell when the market drops and equally hard to buy more, but think about it. Things just got cheaper. You have an opportunity to invest at a 20% discount. Take advantage!
Make sense? If not, email me lets discuss.
Fun Fact: One million Earths could fit inside the sun – and the sun is considered an average-size star.
Disclaimer: This is meant to be general information and is in no way a recommendation for any investment product.