Just hearing the term “bear market” elicits a strong emotional response in most people. Sure, we know that bear markets are a part of normal market cycles and that they’re typically much shorter and less extreme than bull markets. But that doesn’t make it any easier to stomach a large loss or to watch the value of your positions steadily erode away.
When the emotional stakes are high, I’m always reminded of early conversations I had with my children about controlling their emotions. “Emotions,” I told them, “are a natural part of being human. Emotions are neither positive nor negative; they are neutral. What matters is the way you let them affect your life. You can’t let your emotions get in the way of your relationships.”
I’ve had to follow my own advice more times than I’d like to admit as my kids grew up. I’m sure many parents can relate to feeling overcome with emotion when your kids are making poor decisions. You want to yell, “What are you thinking?” but end up biting your tongue, realizing it’s better to let them learn some lessons for themselves. In these cases, we have to remind ourselves as parents that we can’t let our emotions get in the way of our relationships.
You see where I’m going with this. The same principle applies to times of market uncertainty and heightened emotions. We have to allow ourselves to acknowledge our emotions and how we’re feeling, but then we have to work through that. As the cycle of investor emotions above demonstrates, these emotions are human and natural — but we can’t let them get in the way of our investing.
High Stakes, Heightened Emotions
With the market volatility we’ve seen in the last few weeks, I understand the uncertainty people are feeling. Even as someone who manages investments, I’m human and experience the same emotions. Steep drops in the market aren’t easy to swallow — but they don’t have to be devastating if you’re prepared for them and understand the opportunities they present.
These heavy dips actually offer tremendous buying opportunities if you’re in the position to take advantage of them. Essentially, these low prices give you the chance to move some of your bonds to equities and buy while they’re “on sale.”
Strategies for Smart Shopping
Think of it like shopping for sales at your favorite store. If you happen to shop on a day there’s a 75% off sale, you’re still getting a great deal. If you come back next week and see everything is now 80% off, you can still buy more then. But if you come back the next week and there is no sale at all, you completely missed out on the opportunity to score a good deal.
For example, I remember in the 2008-2009 recession, we had a client we weren’t able to reach for more than a year. When we finally connected in March of 2009, it was one of the lowest points in the market. The client’s inclination at that time was to move everything to cash, but we counseled him to consider buying equity. Had we moved everything over to cash, we would have missed the huge uptick that has occurred since then and the resulting returns he has enjoyed because of it.
Time to Shine: The Value of Your Financial Plan
Again, there’s no bell at the bottom and no bell at the top of the market. But that’s why we have a mixture of stocks and bonds in our GWS portfolios. When equities go down, we can use those bonds to start to buy into equities. And as equities expand, we can take some of the chips off the table and move to bonds.
After all, the risk is not that the market goes down; we already know it will go up and down over time. The risk is that you need cash when the market is down, and that it’s your only source of money. That’s why cash flow planning and risk management are such vital parts of GWS’ three-bucket approach to financial planning, which ultimately aims to strategically balance your level of risk to accomplish your goals. Our clients’ financial independence is paramount.
In regard to cash flow, GWS strives to maintain a 24-month cash buffer, knowing the average bear market lasts 22 months and average recession, 15 months. 1 After 24 months, returns are generally back to even, so the intent of a cash buffer is to get you through the temporary turbulence. As we do at the beginning of every quarter, our advisors actually just went through the exercise of reviewing all GWS clients in or nearing retirement had this buffer built into their financial plans.
As Warren Buffett put it, it’s wise to “Be fearful when others are greedy and greedy when others are fearful.” When others are greedy, it is likely that prices are bubbling over — making it easier to overpay for an asset. When others are fearful, however, it’s your time as an investor to take advantage of value prices.
At the end of the day, the market doesn’t lose investors’ money. Investors lose money when they sell something when the market is down. To be truly bear-market ready, you have to be both psychologically ready (able to understand and process your emotions) and brave enough to be greedy when others are fearful. Just ask my kids.
1JP Morgan Market Insights: Guide to the Markets, Jan. 16, 2020.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
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