Imagine this: The equity markets have lost 30 percent of value since the all-time high, set recently, and the news media and economic experts are terrifying. Everyone, it seems, fears that this is shaping up to be another 2008 financial crisis, or worse. How do you feel? What do you do?
“I don’t really want to lose anything. That is a lot of money for me! I don’t have time to recover.”
Sound familiar? Rest assured, you are in good company. We hear this, and more, often. A lot.
In the depths of the 2008 financial crisis, my wife and I took out the largest loan of our lives and became the sole owners of a personal financial planning business. Our new personal debt added to the incredible personal stress we felt as we talked with our clients about their own financial stress. The salaries of our staff, the lease payments and the revenues of the firm were all threatened. We were a microcosmic mirror image of the economy.
Had we asked the experts for advice, we would have found no comforting predictions. The headlines screamed at us, “Who’s Next?” We witnessed the terrifying collapse of Bear Stearns, Lehman Brothers and other huge companies. The global credit system ceased to function in the weeks after Fannie Mae and Freddie Mac failed and needed government assistance. Huge employers, AIG and GMC, needed the United States government to keep them out of bankruptcy. 2008 was a perfect storm with no clear way out.
As it was then, so it is today. We can find no solace in the news. The trade war between the world’s two largest economies, the United States and China, pressures the economy of the entire world. The free trade zone of the European Union is under attack as countries, most famously Britain, threaten to exit. War paints a gloomy background, with increasingly common attacks becoming more deadly. International leadership, like the United Nations, is questioned, ignored and losing relevance. Seemingly, the news makes it sound like things are spiraling towards chaos.
And yet, the last bear market ended more than 10 years ago. The S&P 500 bottomed out at 656 on March 9, 2009. Today, equities are more than four times higher — plus dividends. During this time, the news was bad, but the equity markets were good.
“The function of economic forecasts is to make astrology look respectable,” said John Kenneth Galbraith, years ago. Instead of consulting the news for answers, we need to look elsewhere. To history, perhaps.
Historical market performance
History tells us that market declines are short-lived, and long-term rewards are tremendous. Academics say, when volatility increases, future equity market prices may decline. Naturally, when markets decline, we feel an urge to act — to go to cash and protect what we have from more losses. If we act on that instinct, then we create for ourselves an even more daunting and dangerous task: How do we time our re-entry into the market?
How will we know the right time to re-invest? When we feel better? Is it when the market is going up? By then, any meaningful gain in the equity markets will have already happened, and we will have missed out.
Missing even one day can cost you a fortune. From 1974 to 2015, a $10,000 investment in the S&P 500 grew to $800,000
. However, if you missed only the best day of each year, over more than 40 years, your portfolio would have grown to only $93,000. You would have taken almost all the risk, while earning only a fraction of the return. The costs of poor timing are huge — in this case translating to $700,000 less retirement savings.
In any given year, the equity markets average decline is close to 10 percent en route to delivering an average, annualized positive return of greater than 10 percent, according to data compiled by J.P. Morgan asset management
. The thing is, if you’re trying to time the market, no one is going to tell you (because nobody knows) if that 10 percent is going to slide down further. It’s going to feel unique, and scary and real.
We’ve experienced a bear market almost every five years since World War II
. During that same time, the S&P 500 has risen nearly 200 times in value. Each bear market was terrifying, and unique, and there seemed no clear way out. An average bear market decline was worse than a 30 percent loss. But an average length of a decline was less than 18 months before the equity markets resumed their long-term upward trend.
Dramatic. Short. Emotional. Reacting to a bear market is not a good recipe for a long-term financial plan.
No one can predict what will bring our bull market to a (temporary) end. Nor is there anyone who can predict what will end the decline and restart the long-term, upward trend of the equity markets. However, you can put yourself in a good place through financial planning.
Learn from history, stay in the game and talk to a CFP® professional to develop a financial plan for both bear and bull markets.