It’s a Time to Stay Focused and Think Strategically
By Barbara Trombley, CPA
If you have a retirement account, as many of us do, it is hard not to follow what is going on in the financial markets today. We are officially in a bear market, defined by a drop of 20% or more in a broad market index.
The Dow Jones Industrial Average crossed into bear market territory on June 13 of this year. Unfortunately, bear markets may plummet even deeper than the 20% threshold and may do so over a prolonged period. It is a tough time to be an investor during this scenario but, eventually, the market finds a bottom and investors feel comfortable once again to begin buying, putting an end to the bear market.
Bear markets are usually the result of a recession or some other financial strain. We are not officially in a recession, but many experts think that one is coming. A recession is defined as a significant decline in economic activity that lasts for months or years. This often means that unemployment rises as companies fail or shrink to control costs. Corporate profits fall causing a decline in stock market prices.
Usually, a bear market signifies tougher economic times ahead. Unfortunately, bear markets are ‘normal’ and happen periodically. We actually experienced a short bear market at the beginning of the pandemic. Bear markets tend to be much shorter than bull markets (when stocks rise over a period of time). They also tend to be less statistically severe, with average losses of 33% compared with bull market average gains of 159%, according to data compiled by Invesco.
“It is a tough time to be an investor during this scenario but, eventually, the market finds a bottom and investors feel comfortable once again to begin buying, putting an end to the bear market.”
What should an investor do during a bear market? Risk tolerance, asset allocation and your age really come in to play right now. The percentage of equities in your portfolio should match your risk tolerance and age. For instance, if you are in your thirties and forties and are investing in your 401(k), you could be very aggressive and have a large percentage of equities.
If this is the case, then you should be thrilled to make your monthly deposit into your account. You are buying stocks ‘on sale’ and you have many years to make up any temporary losses in your account. Even if you are a few years from retirement, and depending upon you situation, a bear market could be seen as an opportunity to purchase stocks at a discount.
A prolonged bear market for someone approaching retirement or a new retiree could mean making some changes to your lifestyle. For example, you could limit withdrawals from your investment account and/or eliminate panic selling. When you withdraw money or sell in a bear market it is considered “locking in the losses.” Perhaps you can cut spending or pick up an extra job for the short term, until the economy is on more stable footing.
There are financial products available that could potentially be suitable in many portfolios. In some cases when determined appropriate, an annuity could be used to create more stable income, a REIT (Real Estate Investment Trust) could be used to help diversity a portfolio and many insurance companies offer products with downside protection. Consult your financial advisor for different ideas to help address the volatility in your portfolio.
Perspective is key to a good night’s sleep when dealing with market volatility. Downturns are a normal occurrence in the stock market. Since 1932, bear markets have occurred, on average, every 56 months (about four years and eight months), according to S&P Dow Jones Indices. Make sure to keep emergency funds in the bank to keep market withdrawals to a minimum. Do not make rash changes to your portfolio. There is a saying that ‘time in the market beats timing the market.’ It is very hard to predict the exact best day to sell a stock or to buy a stock. Missing the best days in the stock market, over time, can seriously undermine your performance. Having a plan and sticking to it could yield the best results in the long term.
If you are a new investor, you may want to proceed cautiously. One potential strategy is to dollar cost average any funds that you have into the market (spread the investment over a period of time). This way you are buying at different price points in the market. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
No one is predicting when the market bottom will happen, and it is nearly impossible to time. I believe you should see to have a well-diversified portfolio with a mixture of asset classes, though there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Always remember the adages “This too shall pass” and “Time is on your side.” Those people that have been investing for a while have been through many economic downturns and have survived and, most likely, thrived if they have stayed the course and stuck to their plan!
Barbara Tromblay is a financial advisor and CPA with Wilbraham-based Tromblay, CPA: (413) 596-6992. Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.