Temporary Declines are Inevitable
It has been more than 3,280 days since we hit the bottom of the Financial Crisis on March 9, 2009. The 17-month drop in Market Values that began on October 10, 2007 saw the Standard and Poor’s 500 lose more than half of its value as it dropped from a high of 1565 to its low point of 676. If you had retired at the start with $1,000,000 fully invested in the S&P 500 you would have watched your nest egg shrink to $430,000.
Unfortunately, no one notified us when it was over – in fact to this day I have met many people and heard many “gurus” who could never acknowledge that the ensuing 9 year bull market was real even as the S&P 500 QUADRUPLED in value over that time. Throughout the recovery we have been bombarded with negative press stating the run was over. According to Business Insider on January 15, 2010: “US stocks surge back towards bubble territory”. Again on May 3, 2011 from Business Insider: “Why this stock market looks like the tech bubble of 2000 all over again.” The New York Times May 6, 2014: Time to worry about stock market bubbles”.
In addition to marking the official end of the Financial Crisis, it has been more than 3,280 days since we have experienced a Bear Market - defined as a decline of over 20%. Bear Markets typically occur every 5 years. We have come close as February 8th saw our first correction of over 10% for the first time in 2 years. Corrections typically occur once every year. As Mark Twain said, “History does not repeat itself, but it often rhymes.”
I am not calling this a bear market – I don’t claim to know the future and I have yet to find someone who can. Clearly the media has not helped anyone throughout this 9-year bull run as every step forward has been met with fear and trepidation. I believe Peter Lynch said it best when he stated: “More money has been lost by investors preparing for corrections, than has been lost in the corrections themselves.” Market timing doesn’t work but those that have a plan in place to ride out a bear market can greatly benefit their longer-term objectives.
If you are working, then you should appreciate bear markets as they allow you to save more money towards retirement by buying more shares at cheaper prices. Those who are already retired need to have access to reserves that they can sustain the lifestyle needs without withdrawing investments at depressed prices. A cash reserve, a line of credit, fixed income investments and dividends can all help sustain cash flows through the difficult draw down period.
The results of staying invested through Bear markets have historically rewarded the patient investor as since 1928 the S&P 500 has compounded at seven percent above inflation – a bit more than twice that of quality corporate bonds - according to Investopedia. Just like the Financial Crisis, there will always be talking heads discussing a new potential crisis or just the need for a plain vanilla bear market that is just part of the economic cycle. Your plan and your reserves, can help you stay invested through the worst of it until your broadly diversified portfolio of companies potentially rebounds to profitability in the new normal.
Until then, enjoy the rewards of owning great companies but be prepared for the pain that comes with inevitable, but historically temporary declines. “Accept certain inalienable truths – Prices will rise, politicians will philander, you too, will get old. And when you do, you’ll fantasize that when you were young: prices were reasonable, politicians were noble, and children respected their elders.” Mary Schmich
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Gardner Sherrill, CFP, MBA, is an independent financial advisor with Shoreline Financial Partners. To learn more visit shorelinefinancialpartners.com. The opinions expressed in this material are not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial a registered investment advisor. Member FINRA/SIPC.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.