In the last 10 years, the US stock market has increased, somewhere around tripling in value. Except for a speed bump here or there, we have had few reminders of what can happen in extremely difficult years.
Someday, perhaps in the coming months or years, we will get the opportunity to relearn what happens in a “bear” market for stock values. The evidence is clear that periodic stock market declines are inevitable. During these declines, one value of a fiduciary adviser is to constantly help the investing public understand what can happen and how to properly react.
But we never know when these declines will occur!
Note: Generally, the talking heads on television and fast-talking, cold-calling stockbrokers are NOT fiduciary advisers. They have only limited responsibility to serve the best interests of their customers.
Here’s a conversation that I envision having sometime in the future:
“Jeff, this market scares me! I’ve been reading the stories… I’m thinking we should get out and go to cash, wait out the storm, and then get back in,” the investor will tell me. This is almost verbatim how these conversations tend to go. I’ve had it more times over the last four decades than I can even guess.
I then ask their time frame for the investment and remind them of the necessity for long-term thinking and investing, assuring them that the asset mix they have in place was well thought out during a period when “cooler” heads thought about a lifetime result. Sometimes reason returns, but not always. When investors say, “Sell,” I ask them, “When will you get reinvested again for the long run?”
And here is what can happen:
Some or all of the investments are sold, and the proceeds go to a cash fund. Often, during the scary days when these conversations occur, market values do decline more. But it’s hard to get back in to reestablish the portfolio because the investor can see markets are still going down and no decisions are made.
This goes on for a few months (or more), and the markets flatten out. Still, some investors think, there’s no good reason to move. The economic news is often still bad, so cash feels right. The market temporarily confirms that the sell decision was correct. Or so it seems.
Then one day, the markets tick up, and before long, things start to look better. The investor is still holding cash and thinks, “When it drops back down to that lowest level it reached, I’m buying back in. I’ll get a chance to buy at the bottom.” But it doesn’t get back to that lowest level; rather, it inches up.
The problem is that there’s never an “all-clear” sign.
A few weeks later, the investor decides to stop waiting for that lowest low and to get back in when the market slips back to where it was last week. And it doesn’t decline.
You can see where this goes. It’s not uncommon for the buyback to be made at or well above the sellout level, which is often not “even” because taxes will have to be paid on anything sold at a gain. One prospective investor I met with this past summer was still in cash after selling out in 2009 at the bottom!
Certainly, all investors don’t react the same way to rising or falling markets. While the preceding example may never happen again, I’ve been involved in the “when do you get back in?” conversation many times.
The best medicine is to prepare for the downturn in advance. Have the right asset mix in place for your goals and be sure your equity exposure is within your risk-tolerance thresholds. A fiduciary adviser can help you think this through, in advance of the inevitable but unpredictable decline.
Review the history of the stock market and how emotions can be overwhelmed by the news and the media.
Put your plan in writing. At Buckingham Strategic Wealth, we create an Investment Policy Statement for each client, review it with the client often, and set the stage for how we will respond to difficult days in the market.
The price for an attractive, long-term return on your investment holdings is enduring the discomfort and potential anxiety that accompany bear markets in stock prices. To be forewarned is to be prepared.
If you know someone who is nervous about the markets, and you probably do, feel free to share this post.