The past few weeks people have rightly felt a range of emotions with the volatility of the current market so it can be hard to stay the course when fear is not leveraged with facts. During times of extreme uncertainty, it is tempting to listen to those with extreme positions and shrill voices. It’s the unknown of today’s environment that leads most to rumor and conjecture; but with knowledge and information in your back pocket, you can have the optimism to face the future with confidence.
Let’s start with the facts.
Putting markets in perspective.
- Bear markets occur roughly every six years. They are not uncommon, but our perspective has been skewed after nearly 11 years since the financial crisis. During that elongated period, the S&P 500 had a nearly 530% cumulative total return.1
- Historically, the average number of days from market peak to entering bear market territory (-20%) was 256 days. This market turn occurred in just 21 days. To put in perspective, the financial crisis took 274 days to reach this trough and culminated after 17 months in March of 2009. 2
- Over the past 60 years we have experienced six bear markets. They have an average length of 15 months, and recovery tends to take two years. 3
Diversification can work.
- It is rare that investors are exposed to any single index or asset class. In comparison to market losses, a balanced and well-diversified portfolio is typically down less than the market.
- As is the case in many bear markets, diversification can act as a ballast to mitigate equity risks. During the financial crisis, a balanced (50% stocks/50% fixed income) portfolio helped to moderate losses by 22%. In addition, recovery from those losses occurred almost two years earlier than if you otherwise would have been fully exposed to the market. 4
- What hasn’t worked?
- Traditional forms of “risk off” strategies such as gold, alternatives, and hedge funds, as well as less-traditional Cryptocurrency, have also experienced losses.
- Trying to time the market. Between January 3, 2000 and December 31, 2019, six of the best 10 days occurred within two weeks of the worst 10 days. Recently, we have seen market swings of significance day after day in both directions. Earlier this month we saw the fifth most-significant percentage drop in the S&P 500 – nearly 10%. The very next day the tenth largest gain of all time occurred – of 9.4%. Participation in markets is key, irrespective of daily outcomes. 5
The chart below indicates the growth of $10,000 over the past 20 years ending 2019.
What does this mean for you?
A portfolio should be structured to expect and withstand volatility. It must be built with your objectives, risk tolerance and timeline in mind. When that is done correctly, the response to a market crisis such as this is not to shrink away and hope for the best. Instead you should have a qualified professional help you:
- Protect your capital by remaining prudent to assure your portfolio aligns with the basic principles of diversification.
- Harvest existing gains and offset against any loss positions to reduce taxes.
- Create additional cash to in your account to provide for liquidity needs during the recovery phase
- Explore the financial landscape in search for valuable additions to your portfolio in preparation for the recovery that will happen in time.
Protect, Harvest, Create and Explore. Employ these strategies with discipline and strength to confront the present challenge and those that may come. This strategy is crafted to last for decades, not days and I believe this is the only way back. It sounds simple, but it may be tough to stomach if you’re doing it alone, or you haven’t already worked with a qualified career professional who has performed well in these kinds of markets.
This is not the first time we’ve seen a huge market correction and believe me, it won’t be the last. The question is, are you comfortable that you have done all you can to be on the right side of this financial event? I hope you have. If not, please call your financial advisor today.
If you have any questions, comments or just need a second opinion, contact my office. We will be more than happy to help.
"It’s Your Life…Plan for it."
Eric D. Bailey, CFP
125 Sourced from Morningstar Direct using S&P 500 TR.
3 Sourced from Morningstar Direct using S&P 500 TR. Bear market defined as a 20% decline in value.
4 Sourced from Morningstar Direct using Lincoln’s Balanced Asset Allocation (50/50), as of 3/6/09.
Chart sourced from Morningstar Direct using S&P 500 TR
Eric Bailey is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Bailey Wealth Advisors is not an affiliate of Lincoln Financial Advisors.