Or if a Recession may be on the Horizon?
“How can you be so calm when the market is declining?” asked a client recently. “Is now the time to get out of the market?” or “Are we headed toward a recession?” or “Should I move to cash now or into an asset more tangible like real estate – something I know is a good investment?”
Negative stock returns and aggressive US Federal Reserve interest rate hikes have many investors concerned that we may be headed for a recession —if we’re not already there. As investors watch the indicators, listen to the news, or even sense foreboding clouds of uncertainty gathering in our current economy and world today, some clients may ask these questions. The 2022 Quarterly Market Review for Q2 posting negative returns can understandably be unsettling to see this stock market volatility. We believe natural instinct is to want to do something to counteract this volatility.
When the market may be declining, we recommend investors to consider 2 Possible Points to Pause and 7 Considerations for Responding to a Bear Market:
Consider 2 Points to Possibly Pause:
1. The Worst of Days May Lead to Better Days
In my career as a financial advisor after helping many dentists, if there’s any calm I am feeling or confidence I have about the market, it is because this is not the first, nor will it be the last time I’ve seen and experienced moments like we’re currently experiencing. “Downturns aren’t rare events: Typical investors, in all markets, will endure many of them during their lifetime,” reminds a recent article published by Vanguard, Navigating a Down Market.
During the stock market downturn in 2008, a client called me and said that he wanted to take all of his money out of the market. Despite the bleak headlines at the time, I encouraged this client to stay invested and told him that the stock market could rebound, and if it did, he would be sitting on the sidelines. However, he was convinced, and decided not to follow this advice.
Within a week or two, this same client called me back after the stock market recorded one of its best days ever. He called to tell me that since the stock market had a very good day, he now felt like we knew which way the stock market was going. So at his request, we got back into the stock market just in time for the stock market to take another dive. Unfortunately, these two phone calls cost this client a significant amount of money and derailed his financial plan.
Especially in times of volatility, we never know when good days in the stock market may occur. This brief video explains the importance of staying invested in the stock market.
Big return days may be hard to predict, but you don’t want to miss them, so stay committed to your long-term investment plan especially during volatile times.
2. A Recession may not be a Reason to Sell
In a recent article Are We Headed for a Recession?, Wes Crill, PhD & Head of Investment Strategists & Vice President at Dimensional Fund Advisors, reports that “recessions are always identified with a lag. By the time one is called, the worst of its impact on markets has usually passed.”
Past recessions have come in all shapes and sizes, but the National Bureau of Economic Research (NBER) identifies the factors that indicate recessions including phases of the business cycle, consumption and income data, employment rates, and gross domestic product growth. However, none of these factors are consistent indicators of an actual recession, so recessions are named retroactively, after additional economic data is made available. In other words, there’s lag time, and recessions are only called with the benefit of hindsight.
Beware of responding to announcements of recession is because of this delay, and markets may often be on the way toward recovery by the time recessions are proclaimed. Interesting to examine is how markets around the world have often rewarded investors even when economic activity has slowed. In a recent article Market Returns through a Century of Recessions, the historical data is presented in an interactive graph you can see where the consequences of each past recession on the market by clicking on the graph here.
As you can see by clicking on the many past recessions throughout the history of the stock market, an important lesson on the forward-looking nature of markets becomes clear and highlights how current market prices can reflect expectations for the future of market participants. In two-thirds of recessions since 1980, the stock market had already bottomed out prior to the announcement month, something likened to “fret lag.”
Here are a few things to keep in mind if a market tumble makes you feel the need to “do something."
Consider 7 Solutions for Handling a Bear Market:
1. Be Aware the Bear May Indicate a Bull of Opportunity May be Around the Corner
As indicated on page 16 of the lessons learned in the 2022 Q2 Market Review, returns have often been positive while in a recession. Most interesting to note is to see how the market has responded to the 9 Bear Markets since 1980 (research recently published by Vanguard in Navigating a Down Market), as you can see in their chart below:
The bear markets over the past 40+ years may have been sharp, but as you can see, “many bull market surges have been even more dramatic, often longer and leaving stock investors well compensated over the long term for the risk they took on.” (See Navigating a Down Market). In the 3 Crucial Lessons for Weathering the Stock Market’s Storm,” on page 17 of the 2022 Q2 Market Review, research indicates that over the past century, US stocks have averaged positive returns over one-year, three-year, and five-year periods following a steep decline.
Yes, it stings to watch your portfolio shrink, but imagine how you’ll feel when it’s stuck while the market rebounds.
2. Broadly Diversify Your Asset Allocations
In a downturn, it’s vital to avoid too much exposure to the worst-performing areas of the market. While history shows that the stock market tends to rebound, this is not always true with individual stocks or entire sectors. (For example, how many railroad stocks do you own?). That is why we work hard to ensure our clients have a diversified portfolio, weighted with investments tailored to their long-term financial plan, makes sense for your risk tolerance and goals. Stocks (value and small-company as well as large cap), bonds, international markets, etc. are all important ways to diversify and insulate your portfolio from exposure in any one area that could take a hit.
3. Ride Out the Volatility with a Trusted Partner Dedicated to Your Financial Plan
To the get to the best days often means riding the worst. Timing the market is futile. “The best and worst trading days often happen close together and occur irrespective of overall market performance for the year.” (See Navigating a Down Market). “Reacting to down markets is a good way to derail progress made toward reaching your financial goals,” says Marlene Lee, PhD.
“Over the past century, US stocks have averaged positive returns over one-year, three-year, and five-year periods following a steep decline… One of the best ways to avoid succumbing to emotion at the expense of your portfolio is to partner with an advisor and make a plan.”
--Marlene Lee, PhD (See “Three Crucial Lessons for Weathering the Stock Market’s Storm”)
At Financial Freedom for Dentists, we are dedicated to helping you develop a plan that incorporates the chances you’ll experience some market lows, but through a well-designed portfolio to help you weather the current storm and get to the other side.
4. Take Advantage of the Opportunity to Rebalance, Rebalance, Rebalance.
We actively manage our client’s portfolios. While for some advisors, this means calling clients to sell the latest product or newest investment. However, predicting which segments of the market will perform well has not yet proven to be a successful long-term strategy. At Financial Freedom for Dentists, we are committed to helping clients toward their long-term financial plan. That is why we review our client’s portfolio’s regularly and rebalance them if needed.
5. Control What You Can: COSTS.
While returns tomorrow may be outside of direct control, and they can be most painful when the market is declining, expenses take a bite out of returns. That is why we use low cost funds in our client’s portfolios.
6. If you’re still stressed and losing sleep, Update your Financial Plan, even if it means re-evaluating your risk tolerance.
If the market corrections are difficult to stomach, rather than pulling out of the market, it may be a good time to re-evaluate your risk tolerance. Each financial plan we develop for our clients is adjustable, tailored to your specific needs, concerns and goals for the future. Regular meetings to make sure you’re on track to reach your financial goals is where risk-tolerance is evaluated.
7. Stay focused on the Long-term with Realistic Expectations
Over the near and medium term, higher risks and lower returns are expected, even a normal part of investing in the market. Sticking to a financial plan requires a long-game view.
During the pandemic, we’ve seen many fads come and go. Were you affected by toilet-paper buying frenzies, covid-puppies, baking and yes, even investment fads like FANNGs or meme stocks or dogecoin? “If so, it may be time to put those fads in the rearview,” says Marlena Lee in an article published by Marketwatch.com (Follow These 3 Crucial Lessons For Weathering The Stock Market’s Storm). She continues to give the following recommendations:
“Do you know the names of all the stocks you own? Then you probably own too few. How much of your portfolio sits outside the U.S.? Because about half the global market is comprised of foreign stocks. If you only invest in the S&P 500, you’re missing half of the investment opportunity set. A market-cap-weighted global portfolio is a better starting point than chasing segments of the market that have outperformed in the past few years. And if you want to outperform the market, allow decades of academic research to light the way. Portfolios focused on small caps, value stocks and more profitable companies have had higher returns over the long run. The portfolio I use is invested across more than 10,000 global equities in over 40 countries.”
These same time-tested recommendations, and academically validated and evidenced-based strategies are how we serve our clients at Financial Freedom for Dentists. We appreciate your trust.
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