By Christopher M. Lee, CFP®
We have been in a 5½ year bull market (which is broadly defined as a period where the S&P 500 gains 20% or more without a decline of 20%) since March of 2009. At this point, we may be due for a bear market, which is a market drop of 20% or more. There are many factors that can cause a 20% drop in the stock market including over-inflated prices, geo-political threats, and of course “the unknown”. Before I talk about some ways that could potentially minimize your losses in a downturn, let’s look at some previous declines and what we know of them.
As you can see, market declines are historically normal as seen in the chart below:
Source: American Funds, Intrayear gain and decline reflect largest price changes within each year. S&P 500 annual returns are based on the price index only and, therefore, do not include dividends. Average frequency of declines, as shown in the table, assumes 50% recovery of lost value. The index is unmanaged and, therefore, has no expenses. Past results are not predictive of results in future periods.
Since 1956-2014 (or the past 58 years) there have been 12 bear markets (market drops of 20% or more) or one bear market every 5 years. There are still many nervous investors after the 2008 market decline (understandably) and many investors are still nervous in today’s markets as some of those wounds have not healed. For those clients who have been with New England Capital through those times and stayed the course (and did not react on emotion), they have been greatly rewarded. Unfortunately, many investors get caught up in headline news/risk. Over the past 58 years, there has been significant headlines including: Cuban missile crisis in 1962, Vietnam war in 1966, President Nixon resigning and the oil embargo in 1974, Black Monday in 1987 (stock market plunged 23% in one day), Gulf War in 1990, and September 11th in 2001 are just some of them.
So we now know that since 1956 there have been 12 bear markets. What has happened following those declines? The average annual gain 10 years after those market lows has been approximately 12.1%.1 What else is amazing is that if you looked at the average gain 10 years after a market high (or peak to peak) over those same 58 years, is that the market still averaged 7.8% (for those investors who are possibly worried about “buying high” right now).
We believe that clients need to get away from the short term noise (aka headline risk) and focus on the long term goals. Would it be safe to say that a lot of investors think the last 30 years have been tough to invest in? What is fascinating is that returns over the last 30 years returned10.8% in stocks, 9.9% in bonds and 4.3% in cash equivelents.2 In fact if you invested $1,000 into the S&P 500 from 1984-2013, generated annual returns ranging from -37% to 38%, but over 30 years it grew to $23,401.3
I think the power of staying the course and staying invested (not trying to “time” the market) is shown in the graph below:
The old adage to “buy low and sell high” is easier said than done. Market movements can be difficult to predict, even for the experts. It’s much better to focus on how much you’re regularly saving and how long you remain invested in the market.
With that being said, the following are some ways to take the emotion out of investing and focusing on your long-term goals:
- A key to controlling behavior is understanding the emotion behind it. It’s natural to feel worried. Even people who are aware of the market’s historical cycles may feel torn between emotions and knowledge. If you’re scared, you’re likely to make poor decisions, which you can be very tempted to panic and either reduce or sell positions. As a result, you won’t be in the market to participate in the rallies that often follow market declines (and miss some of the best trading days listed above).
- Sleep on major decisions before taking action. A 24- to 48-hour window of reflection may help you avoid making short-term decisions during volatile markets which may negatively affect the value of your portfolio and your long term goals.
- Call us! That’s what we are here for (and what you pay us for). If you are concerned or worried about something – call us. We are more than glad to explain things to you. Knowledge is power and can reduce your fears of the “unknown”.
With all of that being said, a bear market may not be right around the corner. In fact, this bull market ranks as the sixth longest since 1928 -- just behind the bull market from 1982 to 1987, according to Bespoke Investment Group. The current run is now longer than the bull market from 2002 to 2007, when the housing bubble inflated.
But this bull market has a long way to go before it becomes the longest -- that honor goes to the epic rally that began shortly after Black Monday in late 1987 and lasted until the tech crash of 2000 – or almost 13 years. Who knows how long this bull market will last?
At New England Capital, we are constantly looking for new ways to reduce risk and increase returns in the portfolios through diversification that spreads your money among different asset classes, sectors and countries. We know that the next bear market is a “when” and not an “if”. We just don’t know the exact timing of it, no one does - neither do the economists nor the “experts” on CNBC. As the great Warren Buffett once said in a shareholder letter (in 1988) was “We do not have, never have had, and never will have an opinion about where the stock market, interest rates, or business activity will be a year from now.”
We take your hard earned money very seriously at New England Capital and we take great pride and stewardship in managing it. We are here, working hard, to help you achieve ALL of your life goals.