Bear Markets…Time to Panic?
By Martin A. Federici, Jr., CEO of both MF Advisers, Inc. and MF Tax & Accounting, Inc.
Biden’s U.S. energy policy coupled with inflation from world-wide government spending (propping up economies during the pandemic), the Russia/Ukraine war, and interest rate increases has caused some market volatility, and many world stock markets have either fallen into or are close to hitting bear market territory (declines of more than 20% from the high). You’ve probably felt some heightened volatility in your portfolio. Should you panic and sell all your investments? Often the answer to that question is NO. What most people should be worried about is how this volatility affects their portfolios and financial plans for the long term (NOT the short term).
For most people who are younger (in your 20s, 30s, 40s, and early 50s) or have at least 10 or more years to accumulate assets towards their goals, you probably have very little to worry about in regards to the latest financial turmoil. In fact, it will probably give you an opportunity to buy some discounted investments, thereby helping your portfolio grow more down the line. So be ready with any extra cash you may have to invest in bargains, and/or possibly sell off certain investments that may no longer make sense to hold in your portfolio (i.e., end of year tax-loss harvesting to erase any big portfolio gains).
For those closing in on and those already in retirement (in your mid-50s, 60s, and older) or those who have less than 10 years to accumulate assets towards their goals, you may be a bit more concerned about how this recent market turmoil may affect you (and understandably so). However, let’s highlight some statistics that may make you re-think about worrying too much:
Market corrections are normal. In the U.S. markets we average a 10% correction ~ once a year and had two in 2018 (S&P 500 was down more than 10% in the 1st & 4th quarters of 2018), the bear market (down 34%) in the 1st quarter of 2020, and our current bear market. Bear markets occur every ~ 3-1/2 years and we’ve been more than due for one (the last U.S. bear market was the shortest in history).
Bear markets have been shorter than bull markets historically. On average, bear markets last ~ 15 mos. and 80% of corrections since 1974 have NOT led to a bear market1. Bull markets, on average, last ~ 4.5 years with an average cumulative gain of ~ 153.7% (since 1942).2
Market movements are random in the short term and predictable in the long term. Try this exercise: For the next 15 business days (three weeks) try to predict where the markets are going to go the following day. To keep it simple, all you have to do is predict whether it will go up or down (you need not worry about how much). The chance of you getting all 15 days right is less than 1 in 33,000. To put this in perspective, you have a higher chance (1 in 9,000) that the Earth will be struck by a huge meteor during your lifetime.
Anticipate better days. The effects of corrections don’t last long. After a drop of 10% to 20%, it typically takes ~ four months to break even. Also, a severe bear market tends to be followed by a sharp bull market rebound. Each time that stocks dropped 40%+, they rebounded by ~ 33% during the first year of the comeback.
So what should you take away from these points? If you can remain patient (and not panic) and put more money to work in quality investments after the markets pull back by more than 10%, and can maintain a long-term investment perspective, historically that has greatly helped investors reach their financial goals. After all, we’ve all heard of the sayings, “buy low, sell high” and “buy on the dips” – unfortunately most investors do the exact opposite and that’s where they cost themselves.
Don’t be in that group that makes emotional investment decisions – now that you’re armed with this knowledge, take advantage of it and your financial situation as well…you’re welcome!
Find an experienced financial advisor who regularly advises clients to not panic during volatile markets, works for an RIA firm, earns his/her money from fees (NOT commissions), believes in having an abundance of investment choices for clients, and has the heart & demeanor of a teacher, NOT a salesman, and chances are you’ve found the right financial advisor to help you prepare and plan for your financial goals.
For more information, please visit http://www.mfadvisers.com, email marty@mfadvisers.com, or call (570) 760-6524.
About MF Advisers, Inc.
MF Advisers, Inc. is a full-service, fee-only RIA firm and fiduciary based in PA & FL specializing in wealth management, investment advice, and financial planning.
With 25+ years of licensed experience, over 10 years of professional education, and an unwavering commitment to improving your financial situation, MF Advisers, Inc. is the advisory firm to best serve YOU.
Market Corrections Are More Common Than You Might Think from Schwab Center for Financial Research - https://intelligent.schwab.com/article/stock-market-corrections-not-uncommon
History of U.S. Bear & Bull Markets Since 1942 from First Trust Advisors L.P. - https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=4ecfa978-d0bb-4924-92c8-628ff9bfe12d