Note: This market review was published on May 24th, 2022 and may not be reflective of current market or investing issues.
“A genius is the man who can do the average thing when everyone else around him is losing his mind.”
~ Napoleon
The news around the economy and markets is getting pretty loud these days. I thought it would be appropriate to look at some facts and practical advice on how to make wise decisions in uncertain times. Let’s first analyze the current situation. Inflation is high. Labor is tight. GDP growth is slowing or has slowed. The Federal Reserve is tightening policy. The US stock market is in a correction (down 10%+) or bear market (down 20%+). The bond market, which is supposed to be safe, has been down more than 10% this year. Housing is slowing. These are leading to more and more headlines on the subject of bear markets and recessions. All of these headlines evoke feelings and emotions that can lead investors to make the wrong decisions at the wrong time. A friend of mine likes to say, “Don’t panic, but if you do, panic first.” The great Peter Lynch said this, “Corrections are unpredictable. By selling stocks to avoid pain, you can miss the next gain.” The thing to remember is that corrections and bear markets are natural and not to be feared.
Let’s look at some facts on bear markets. On average, the stock market during a bear market drops 36%, lasts less than 10 months, and happens about every four years.[1] In other words, they happen fairly frequently and are over relatively quickly. That begs the question, why don’t you exit positions and enter back when the coast is clear? To answer that, let’s look at up days during bear markets. Half of the highest gaining days for the stock market have happened during bear markets. Another 34% of the highest gaining days happened just as the bear market has ended when it’s unclear that it has ended. In other words, it’s extremely difficult to predict these things because there are massive up days, and it’s unclear when they end. One of my investing heroes, Cliff Asness of AQR, had a paper at his firm titled Sin A Little.[2] In it he describes that you can’t time the market, but if you have a diversified portfolio and see an opportunity to lean into a situation that makes sense to either underweight or overweight holdings, it can help. This is a practical way to help weather turbulent markets.
So, what are some other practical ways to make lemonade when the markets are handing out lemons?
- Diversification. Having a portfolio that can benefit in different environments and circumstances can help calm fears in a hurry.
- Tax-loss harvesting. If you have an investment portfolio that is in a taxable account, selling holdings at losses can help with taxes at the end of the year. Rotating those holdings into similar positions can keep your portfolio exposures the same but benefit from those realized losses. It also helps to not anchor to the losses if they are sold.
- Accelerate investment. If the market gives you a discount and you can afford accelerating your retirement or investment savings, it can pay off down the road. When shopping for a car and you have been seeing prices going up year in and year out and all of a sudden you that same car you want is selling 20% lower, you buy it. The same thing happens in bear markets and corrections.
- Rebalance. If you are holding a diversified portfolio, you are going to have holdings that are down and some that are up. It makes sense to sell the things that are up and buy the things that are down.
- Dollar-Cost Average. Dollar-cost averaging is simply buying investments over time. Regular contributions to your investments allow you to take the opportunity to buy over time at potentially lower rates.
- Limit Distributions. Taking distributions from your accounts as the market is decreasing means there is less available for the recovery. When possible, we recommend limited distributions during a bear market.
- Stay the course. As indicated above, staying the course can lead to higher returns long- term. The highest gaining days usually occur in a bear market and sharp gains can happen quickly.
Remember, when all you see is negativity that there are some proactive steps that can be taken. Negative returns will come and that is a great time to position for success in the future. Capitalism exists to provide efficient use of resources, and when there become excesses in the system, recessions and bear markets come to correct those misuses. These things can be painful, but they can also lay the foundation for future growth.
[1] https://www.hartfordfunds.com/practice-management/client-conversations/bear-markets.html
[2] https://www.aqr.com/Insights/Research/White-Papers/Market-Timing-Sin-a-Little
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