As a banner year for the stock market draws to a close, it’s worth recalling where we were a year ago. After a strong start to 2018, the S&P 500 Index fell 19.9% during the fourth quarter, just barely avoiding an official bear market. The index dropped about 9% in December alone, making it the worst December since 1931. This drop nearly put an end to the longest bull market in U.S. history, which is still intact with a strong bounce back in 2019.
Some Investors are Unloading Stocks
Recent statistics in fund flows show investors are skittish. There have been significant outflows from U.S. stock funds in recent months even as the market has continued to climb. Those who have been selling are presumably concerned about the trade war, impeachment hearings, Hong Kong riots, the 2020 election, or some combination thereof. We often tell clients “there is always something to be concerned about.”
Time to Sell? No One Knows!
It’s common for us to hear from clients that they want “safe” investments to protect against the next market crash, whenever that might be. Some people go as far as to ask “should we sell all our stocks?” Contrary to popular belief, no one can reliably predict what the stock market will do in the next few days, weeks, or months. That doesn’t stop people from trying, a strategy known as market timing. However, we do know all bull markets inevitably end, and yes, there will be a bear market (a 20% decline in stocks) again at some point. But no one knows exactly when the market will peak. Trying to time the market peak is a dangerous game, as gains toward the end of a bull market are often significant.
Bulls End, but So Do Bears
Just as bull markets eventually end, so do bear markets. On average, once a bear market has begun it takes stocks a little over three years to recover to the prior level. And predicting when the market will bottom is just as impossible as predicting the peak. Once the market bottoms, the subsequent rally is typically very strong in the early days. Being out of the stock market for just a few of those days can severely stunt the growth of a portfolio. So it’s crucial to stay invested. But some still ask if we know a bear market will eventually come, shouldn’t we heavily or even fully sell stocks and hold cash and bonds? The answer for long-term investors is a resounding “no.”
Don’t Kill the Golden Goose
It’s difficult to overstate how dangerous such a flight to safety can be. Unfortunately, it is an all-too-common practice among do-it-yourself investors. Those who flee the stock market to avoid temporary paper losses are unknowingly taking on significant risk. While they experience the temporary assurance of a steadier account balance, they are sacrificing their future by drastically curtailing their future purchasing power, which only comes as a result of the underappreciated beauty of compounding returns.
Saving for Retirement? Keep Buying When Things are On Sale
The consequences of abandoning the stock market while saving for retirement can be especially severe. Savers should adopt the mentality that bear markets are a good thing because they allow them to buy stocks at lower prices. The further out the need to use the money, the less an investor ought to be concerned with the stock market.
Retiring Soon? You’re Still a Long-Term Investor
Those approaching retirement can understandably be extra sensitive to the ups and downs of the market. As the time for withdrawing money from the portfolio approaches, it is important to have some of the portfolio conservatively invested in bonds. But for most investors, the strategy most likely to succeed is to keep more than half of a portfolio invested in stocks both in the years leading up to retirement and through the retirement years.
People retiring in their 60s must plan for about three decades of cash flow, and will likely see multiple bear markets in their retirement years. But at today’s low interest rates, bonds alone will not provide the needed growth. A balanced portfolio provides the right mix of growth and stability retirees need for the (hopefully many) years ahead.
Growth for the Next Generation
In the later stages of life, it’s common to balance the needs of our clients with those of their heirs. If a client has sufficient assets to provide for them in later years, it’s not always wise to “lock it in” by selling all the stocks. In fact, keeping the portfolio partially invested in stocks can provide great value to the heirs, who have longer time horizons and as a result a greater need for growth.
No one really knows when the next bear market is coming, even though we all know the next bear market is coming. Regardless of when it happens, stick to the long-term plan, and stay invested in the stock market.