Well, the last few weeks have been interesting to say the least. In February of 2020 the market hit an all-time high after the longest bull market in history (11 years). Based on history we should have experienced 2 or 3 bear markets by now, so it was only a matter of time before something caused an unpleasant decline.
While this feels eerily similar to the environment back in 2007 before the Great Recession began, at this point there are no fundamental reasons causing the pullback. By all accounts the job market and other economic indicators look promising. The volatility we are currently seeing is driven purely by the Corona Virus, and uncertainty surrounding the gravity of the situation and potential long-term impacts on the private sector. Those who are nearing retirement or currently withdrawing from their investments may feel differently than someone, like myself, who views this time period as a significant financial opportunity. Whatever side of the fence you are on, below are some tried and true tips for white-knuckling your way through a bear market.
1. Maintain realistic expectations on what it means to be an investor.
History has shown the market operates in cycles and downturns are part of the deal. Since the Great Depression of 1929 the S&P 500 has not only recovered, but was up anywhere between 26-85% in the 2 subsequent years following ALL of the sharpest market downturns.
In the 11 years following the bottom of the '08-'09 Financial Crisis, the S&P 500 went from about $676 at the low end to the highest point of $3,393 in February of 2020. (Try convincing a fearful and confused investor back in 2008 this would happen!) While volatility is part of what you bargained for, the outcome has historically been worth the ride.
2. Review your long-term goals and objectives, not just your balance, and stay on track.
In general, if your investments are allocated appropriately (based on your age, risk appetite and financial needs) ahead of time, then you need only sit tight and ride this out.
If you are likely to make irrational financial decisions which are driven by your emotions, do yourself a favor and take a “hands-off” approach.
If you are unsure if your current investment mix is appropriate for you, ask your advisor to review it for you. Among other things, you pay them to support you through times like this!
3. Investors should approach buying at the stock market like buying at the supermarket.
Selling your investments when they are down is like paying full price for a dozen eggs, but leaving six eggs behind at the store on purpose. Who the heck would do that?!
Investors who buy into the market while stock prices are heavily discounted, are like shoppers who scoop up bargains and get eighteen eggs for the price of a dozen. This makes much more sense.
4. If you are in a bind and need cash, be strategic about where you take it fro
The average American lives paycheck-to-paycheck and does not have 3-6 months of living expenses saved. If a recession occurs, it is possible people will need to start tapping into their retirement accounts to make ends meet.
Before you withdraw from your IRA, which could result in a taxable event and early-withdrawal penalties, see if your employer allows for loans against your 401(k) account. Loans against your 401(k) are not taxable, you pay yourself back and the interest goes to you, and you can borrow the lesser of $50,000 or 50% of the balance.
If loans are not permitted, see if your employer allows for hardship withdrawals. If your circumstances qualify, you could avoid early withdrawal penalties or get around potential in-service withdrawal restrictions.
Much like your investment mix, taxation and penalties on withdrawals from retirement and investment accounts can be tricky. If you are unsure of what to do, again, ask your advisor for help.
5. Unless you are cash strapped, don’t hold back on continuing those contributions!
“Shoppers” who didn’t sell when their assets were down and were buying into the stock market at discounted prices during the Great Recession, would have made back the money they lost and would have had significantly more shares to grow their portfolio values as prices went back up.
For example: say I pay $6 for a dozen eggs today. If the price of eggs goes down to $3 tomorrow, I am now able to buy 2 dozen eggs with my $6. If the price of eggs goes back up to $6 for a dozen the next day, I have only paid $18 but my eggs are now worth $24 (should I want to sell them to someone else). I've just explained to you a concept called "dollar cost averaging" and it's a key investment strategy that you are utilizing every time you make an automatic contribution into your retirement account. Think of your contributions in terms of "shares" you are piling up because eventually the market will rise again and the more shares you have, the more your account value will increase.
In summary, HERE is a fantastic piece by Charles Schwab which has some very compelling data on why it makes sense to let common sense and past experience over-ride fear when approaching your investments. Click HERE to download a PDF of this commentary.
If you still have questions and need some guidance, my door is always open!
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