For the past decade, investors have enjoyed excellent returns from the stock market. Stocks, as measured by the S&P 500 Index, returned an average of 13.25% in the past ten years including 2022. Unfortunately, when it seems like stocks can do no wrong, investors become accustomed to constant growth and are then surprised when the market heads in the opposite direction.
Yes, stocks had a very significant pull back in March 2020 (a 30% decline in three weeks) at the beginning of the pandemic, but by the end of 2020, they had recouped all those losses and closed out the year with a positive return of 18.59% as measured by the S&P 500 Index. Investors must look back to 2008 for the last instance when stocks had a downturn that extended more than a few months. Most remember, not fondly, the financial crisis brought on by the collapse of the housing market over a decade ago.
As long-term investors, it is important to keep in mind that bear markets, like we’re experiencing in 2022, occur on average about every five years, but not EVERY five years like clockwork. Thankfully, most bear markets do not last longer than 12 to 18 months. Sometimes the bull or bear markets can be shorter or longer, but in the last few decades, bull markets have tended to be longer than average and bear markets shorter than average. Here again, this can lead to complacency and the idea that stocks shouldn’t go down and if they do, then a change in strategy is needed.
From a long-term perspective, investing in stocks for a short period of time can bring unpredictable results, but when you are invested for longer periods of time, stocks eventually produce positive returns. In the 30 years that I have been helping investors, I have never experienced a bear market that didn’t eventually lead to a bull market recovery. Every time, when you remain in the market, you eventually recover losses experienced during the bear market and move on to new highs!
The most important thing for investors to do when markets are down is to be patient and remain invested. Trying to time the market is all but impossible in my opinion. Typically, when the stock markets eventually turn around, those moves tend to be abrupt and do not occur when expected. The fourth quarter of this year is a prime example.
Since October 1st, U.S. stocks have jumped 12.5% (as measured by the S&P 500 Index) and foreign stocks have increased 14.75% (as measured by the MSCI ACWI IMI Index). This rebound has occurred when some experts are suggesting that our economy is slowing. If an investor had thrown in the towel after three bad quarters, they would have missed a significant recovery in less than two months! The S&P 500 Index is still down over 14% year-to-date, but it is much higher than where it was just two months ago.
Looking back to 1990, an investor who remained invested 100% in a diversified portfolio of U.S. and foreign stocks, and rebalanced quarterly during all of the ups and downs, earned an average annual return of 8.56% through the end of 2021. Even a traditional 60% stock and 40% bond portfolio earned 7.77% annually over that same time frame by staying in the market and rebalancing quarterly. However, an investor who dumped stocks at the bottom, and only bought stocks back after a full market recovery, earned an average annual return of 3.82%! Although the investor who tried to time the market made money, this investor made half as much as the investor who followed their original strategy.
As an investor, what am I doing this year? The same things I’ve done throughout my investing career:
- Adding to my investments in my 401(k) and taxable accounts systematically.
- Rebalancing quarterly by buying assets that have declined in value significantly using money from investments that have declined less.
- Monitoring my mutual funds to ensure that active managers remain disciplined to their strategy.
As you can see, there isn’t a dramatic change to my approach to investing in a down market. Neither should there be for you! The foundational steps I’ve outlined above will serve me well toward achieving my long-term goals when the markets eventually recover. They can for you as well!