The past few months have tested even patient investors. What do you do when the crunch time arrives?
Examining market history may not be your first instinct, but it’s a good place to start. Since the end of WWII, the S&P 500 has experienced 16 occasions where stocks declined by 20% or more, arbitrarily called a bear market; five of these downturns have occurred since 2000.
If you’re thinking that the time we are living through is different than other periods in the past, you’re probably not alone; you also would be wrong. While every market cycle feels distinct, in reality, the long-term track record of the market provides valuable context to calm your fears.
You might feel uncomfortable with the stock and bond markets this year, but you should understand that we’ve been here before.
Why History Can Help Calm Your Fears
Bear markets historically are far shorter in duration than bull markets. Over the past 75 years, bull markets lasted an average of 4.4 years; bear markets lasted an average of 11 months.
Volatility is an expected, though not enjoyable, part of investing. The best way to buffer market volatility is to have a permanent investment philosophy that aligns with your goals. The best philosophy is one that you can stick with when the crunch time arrives.
It helps if you can distinguish the difference between being nervous versus being scared. You can’t control the markets, but you can control how you react to short-term volatility.
Many investors expend too much mental energy focusing on the uncertainty of not knowing what’s next – tomorrow or next week. For context, think back to how you felt when the market plunged 34% during the first few weeks of the pandemic in February-March, 2020. While you may have been scared, you no doubt were surprised when the S&P 500 ended the year up 18%.
Most investors know that markets have historically rewarded those that remain invested for the long-term. You probably understand this on an intellectual level, but market extremes can create an environment where emotions get the best of you.
How Do You Navigate Market Uncertainty?
In a time of economic upheaval, wars, and political polarization, how do you stay grounded? To a large extent, navigating through all the daily distractions requires a reliable “off switch.” Ultimately, you have to be able to ignore the external craziness and focus on your internal behavior. Your particular goals trump everything else going on around you.
Investing in the stock market is always laced with uncertainty – you can’t totally eliminate this uncertainty. While it’s impossible to know how stock and bond markets will perform for the balance of this year, it's important to note that up years follow down years two-thirds of the time.
The real drivers of stock returns are the earnings companies produce; these earnings come from innovation and ingenuity. Humans just like you and me have a long history of adapting and solving the problems of the day – there’s no reason to think this won’t continue.
On the practical level, here are three investing activities that you should focus on during this crunch time: re-balance your portfolio; take tax losses – offset with gains if possible; and finally, keep buying. Start there. Ready for a real conversation?