The most recent bear market, brought on by Covid-19, has been one of the scarier events over the last 20 years. Unlike the prior bear markets of 2001 and 2008, this one has the unknown element of an invisible virus that could kill potentially over a million people globally and has shut most businesses down for the foreseeable future.
You would not be human if you didn’t experience a good degree of fear from the current events around us. A great achievement at times like this is not to give into those fears. In an effort to redirect your efforts in a more productive manner we will address 3 things you should review during bear markets. We are going to address your reserves, your mindset and some tactics to consider.
In our firm we call this your “warchest”. How many years of income do you have allocated to your warchest? Every investment allocation has a specific amount of cash, treasuries, and potentially other assets held as an abundance of caution to bridge through troubling times such as the present. The proper amount varies for each person and requires a good analysis of risk capacity, risk tolerance, and risk requirements to pursue their objectives.
We know that the average bear market lasts 15 months from top to bottom and 3.2 years from top to bottom back to top. A good retirement income plan assumes we have these events every 5 – 6 years. I don’t know anyone who has successfully avoided bear markets so the best plans build reserves into the calculus to stave off drawing down equities at depressed prices.
No bear market feels average or even normal while you’re going through it in fact it often feels like the end of the world. In many ways each bear market feels very different than the last. It is precisely the feelings – not the facts – to which we are most likely to react and potentially overreact.
Sir John Templeton said the 4 most dangerous words in investing are “This time its Different”. Every time I hear this popular phrase I am reminded of a great cartoon years ago of some passengers on an airplane experiencing turbulence and one of them says “we’re all going to die”. Another passenger remarks not to pay attention as the screamer is a financial journalist. In the midst of a crisis you will not find resolve by listening to pundits.
When we’re going through a bear market brought on by a crisis which appears new and unique in which no one especially the so-called experts seems to be able to understand – our best course of action may not be to search out economics for an answer but to search out history. I highly recommend reading Hans Rosling’s book Factfulness to get a better perspective on human progress and our ability to overcome most obstacles. When confronted with a crisis – remind yourself that the best 4 words are “This too shall pass.” If history is any guide and its just about the only guide we have, it’s not okay to act on that fear and to liquidate your long term portfolio in a panic.
Sometimes the best way to deal with a crisis is to be actively doing something. The following are some ideas to consider during a bear market. Review these with your advisor before proceeding.
Tax loss harvesting – recognize a loss in an asset by selling it and replacing it with a similar but not identical asset. This way you maintain your risk / return objective while capturing a loss to be used against a future gain and/or ordinary income.
Rebalancing / Reallocating – every portfolio should have a rebalancing strategy at least annually to maintain appropriate risk adjusted portfolio targets. It’s likely your allocation is currently favoring fixed income. To rebalance now would effectively increase your exposure to equities and potentially reward your courage when markets eventually stabilize and return to normalcy.
Roth Conversions – If you are weighted heavily towards IRA assets you might have been told to try and diversify your tax allocation. See my February 14, 2020 article – Be mindful of your tax allocation. Pushing money out of your IRA at depressed prices reduces your cost of conversion. Again, time does not permit me to go into these in more detail so speak with your advisors before making these potential changes.
These are stressful times. When the markets turn as volatile and confusing as they have over this past month, even the most patient investors may come to question the wisdom of the financial plan they have been following. While no one could have anticipated the current crisis, a good plan will have built in reserves to offset cash flow, a mindset to remain calm and some tactics so you know you are doing the best you can to protect you and your family. Stay healthy!
Gardner Sherrill, CFP, MBA, is a certified financial planner with Sherrill Wealth Management. To learn more visit sherrillwealth.com, a Bradenton wealth management firm specialized on living in retirement. 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.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referred is historical and is no guarantee of future results.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit of protect against a loss.
This information is not intended to be a substituted for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.