How do you feel about risk and uncertainty? Sure, they’re around us on a daily basis, but cushioned in our comfortable routines we can deny them our headspace. Facing a worldwide pandemic has changed all that. COVID-19 adds an extra dimension of fear to our lives. It adds a very real physical and financial threat to everyone around us. It’s shaking us out of our complacency.
Our way of life is coming to a grinding halt and the future is uncertain. The comfortable wave we were riding is giving way to a harsh threat we never could have imagined.
How does that translate to our financial future? Can we survive a bear market?
Let’s explore the possibilities of bear market survival.
Physicians On The Front Line
You are the doctors out there dealing with the reality of COVID-19 and your time is limited.
We would like to take the time to thank you for all that you are doing and sacrificing during this trying time.
Our Facebook group has been flooded with your questions and we want to help you feel a little less anxious about your financial future and today’s bear market.
If you are someone who hasn’t been on our Facebook, feel free to join us there at financial residency.com/community.
We are here to help you through the risk and uncertainty and explore how a bear market will affect your finances and decision making.
Let’s take a detour through history.
It has much to teach us.
Bull Market History
It’s official: we’ve left the bull market. You may be wondering what the heck we’re talking about!
A bull market is one that’s doing good and feeling economically sound. It means the stock market is rising. That might not be the case every day, but for the most part, it’s going in an upward direction. Some of our investors have only experienced a bull market.
It was a great run for 129 months.
That may not sound like long to some people. However, the average bull market is 54 months. The only market that came close to that length of time was in the early 1990s, which ended in the .com crash, lasting 113 months.
What did we gain in those 129 months? A very nice return of 378%, especially if you were just owning the total stock market.
Let’s look at the average gain over all the last bull markets: it was only 164%. That means we’ve had double the duration and double the return in this bull market.
Unfortunately, the bull market is at an end.
Bear Market History
Now, we are entering a bear market.
That’s when stocks are declining in value.
The average bear market is 22 months. There have been some as short as three months. An example is after the 1987 crash, which had similar price movements to what we’re seeing today. They saw these huge, crazy volatile days–just as we are seeing in the current market.
What was the longest bear market?
That particular bear market was 61 months in the late 1930s.
Now, some of you might have heard that the market return during the crash (bear market) of 1929 was negative 86%. It had a duration of 32 months.
We’ve never experienced anything close to that. In the average bear market, the return is negative 42%.
Looking at an S&P composite of the declines from the all-time highs (you can check out our Instagram to see our graphics or go to JP Morgan’s site and download market guides), it’s important to keep in mind that there’s going to be price movement in both directions (up and down).
The take-away here is that these swings occur during bull and bear markets.
We understand that the current swings caught a lot of people off guard because the typical swing of normal market movements is 2% to 5% down a day.
Let’s put things in perspective.
One of the charts put out by JP Morgan is the annual returns and intra-year declines. It takes a look at what has happened in the last 40 years.
On average, the intra-year declined.
During the year, stocks basically lose on average 14%, as prices go up and down in bull and bear markets. However, 30 out of the last 40 years, they have returned positive for the year.
What was the worst year in the past 40 years?
That would be in 2008. That year we had a 49% intra-year decline. It was also the worst year in the last 40 years that it was down 38% for the year.
The chart allows us to see that there are years when he had a 27% up a year…but intra-year declines were negative 19%.
It shows that there are volatility and movement, even in normal markets.
The Current Market
The past markets give us a context in which to view the current one.
Now is not the time to act on your feelings of anxiety or panic and start selling stocks. I know that in the last few weeks, we’ve not had a single day of gain or loss with an absolute value of less than 4%.
That’s incredible and the markets hate that type of uncertainty. As the clear and growing threat of COVID-19 became apparent, investors panicked and overreacted–joining the herd mentality.
As of today, we haven’t had any good news. However, eventually, we will and the positive herd mentality is going to kick in and everything will overshoot to the upside.
In just the month of March, we’re down 25%. As we mentioned before, we’ve seen this multiple times during past times of extreme volatility. The herd mentality kicked-in when the market began moving up and down.
Look at some of those times:
- In 2008: The great recession
- August 2011: fears of contagion of the sovereign debt crisis in Europe (Spain and Italy concerned that France was going to lose AAA rating
- 9/11 the .com bubble burst
History repeats itself, so we can learn from it now. Hold on to your seats. I’m about to drop a bunch of numbers!
Let’s assume that we’re in our 13th bear market since the 1920s, and we’re at 33% down. It would take another 14% drop to get us to a 40% loss overall.
Then it would take another 17% on top of that, to hit a 50% loss.
In the charts that JP Morgan issued 40 and 50% losses are normal. The average return in a bear market is negative 42% and the duration is 22 months.
What does this all mean?
We’ll probably experience more pain and more losses. It’s normal, the average is 42%. In order to hit the average, we need another 14% drop in the markets.
Will it happen? Nobody knows.
What we do know is that it will bottom and then it will recover.
The Next Step
What should you do?
An inaction is an option!
Do you already have a financial plan?
Then you probably already know that down and bear markets are part of investing. Hopefully, you’ve thought about them and built it into your plan.
You may choose to leave things as they are.
Let’s look at some other considerations…
Even if you have a solid financial plan, you may feel like you need to do something like making changes to our investments. However, creating rules around rebalancing is imperative.
Stocks are on sale, so if you’re young you can choose to be more aggressive. The idea of buying low is exciting.
Let’s look at the opposite of being overconfident. We can’t predict the drops and upswings. You don’t want to be caught on either side of trying to time those.
That’s why we encourage you to create rules around your rebalancing. You can use new cash that’s being added to your employer retirement accounts, which will force you to do the right thing
What does that mean?
- If your stock allocation comes down and you need to add to that portion, your cash will buy more stocks.
- If your allocation is already set, they’ll be split among the stocks and bonds that you’ve already chosen.
- If you’re adding money to your account regularly, when the cash hits the account with your 401k, rebalancing will automatically.
- If you use a robo-advisor rebalancing will happen automatically.
However, if your account is at Vanguard, where you’re managing those investments for yourself, it’s not the time to “time” the market.
If you didn’t have a set plan, choose a monthly date (1st, 10th) or a quarterly date, so that you can take emotion out of the equation and stick with that decision.
Take A Step Back
We are going through a crazy time.
If you are a doctor or married to one, you are especially busy. Your mind is overloaded with data, questions, and dilemmas.
Did you take the risk tolerance questionnaire? What’s your gut telling you?
If the current swings are making you uncomfortable, it may indicate you have overestimated your amount of risk tolerance. Perhaps your investment strategy was too aggressive.
That doesn’t mean you should run out and make changes to your portfolio right this minute. It’s better to choose a time when you can be objective!
We’re going to experience some more volatility.
We’re down 30% to 34% (which is not yet to the percentage of the average bull market). The average is usually spread out over a couple of years.
We are seeing panic in the markets because of the amount of volatility that has happened in a month. Keep in mind the average bear market is 42% and extends out almost two years long.
While I don’t have a crystal ball, I will tell you to forgo making any big decisions when your emotions are running high.
If you feel driven to make big money decisions–get some professional advice!
Know a physician WARRIOR? Or perhaps, you are one!? Tell me your story during the COVID-19 pandemic. Let’s get some positive messages out into the media about what you’re doing and how you’re doing it. Visit: financialresidency.com/docwarrior