Year to date the S&P 500 is down -24%, the Aggregate Bond Index is down -16%, and Gold is down -7.5%. There is nowhere to hide, and you do not have to squint to see the direction of the markets. Reality is we are experiencing a historic market period, one that will likely be researched, analyzed and referenced for years to come. Normally, investors expect equity market volatility, but rarely do we see bond bear markets of this magnitude moving in tandem with stock pressure. Commodities saw a big spike to start the year, but many of them like gold and silver have retracted and are also posting negative returns year to date. Investors are left trying to make sense of it all, with common questions arising: How do we trade this market? Can the economy hold up? Is there something else we can do? There is.
This economic cycle has no clear and obvious expiration date. As we wrote in our July article, the average bear market lasts 11 months, with the longest bear market in history lasting 33 months. We are in month #9, currently. We believe that maintaining “staying power” in both bull and bear markets translates into long-term investing success. Making good investment decisions is only part of the battle; every investor must be able to survive bear markets. You don’t have to “like” them, but you must be able to tolerate them. For most of the population, they cannot be sidestepped, traded through or perfectly hedged against. Instead, focus on what you can control.
Best Practices for Maintaining Sanity During Volatile Markets
#1. Do Not Abandon Your Plan
Letting your emotions drive your actions is a recipe for disappointment. Your fear will drive you to sell as markets fall, and euphoria will compel you to buy stocks at market highs. A well-thought-out plan is purposefully designed to weather market swings. Remember, uncertain times and bear markets scenarios are “baked in” to the projections within your financial plan. The investments in our portfolios are carefully designed to support your long-term goals, and changing course midstream can seriously jeopardize your chances of meeting those goals. Having discipline to stick to fundamentals is what separates true investors from gamblers.
#2. Look to Historical Evidence and Data
The truth is nobody knows what the market will do this week or this year. No one, including the investment gurus, has a crystal ball. Market forecast are strictly opinions and should not drive your decisions. We can look to the wisdom of empirical evidence and data to help us sleep better at night. A successful investment philosophy is powered by science, not speculation. If you say to yourself, “I’ll wait until the dust settles to get back in,” it proves almost impossible to time when it is “safe” to re-enter the market. By the time you recognize the “right” time and buy back in, the opportunity likely passed you up long ago, often resulting in you buying higher than when you originally sold. Historical data and tested academic research suggest your best bet is to stay invested and remain in position.
#3. Reassess Priorities
If you start feeling panicked about the markets, revisiting your financial plan is helpful. Review your plan and evaluate how much has changed. Do you need to update some of your financial goals or time horizons? In a well-designed plan, it is often the case that the current environment has less impact than you might think. Also, focus on your overall wellbeing. Don’t sweat the things you cannot control – like the markets. Develop an awareness of and protect your wellbeing by spending your time and energy on the things in your life that matter to you.
#4: Maintain Liquidity
Vitamin Cash. Any good adviser will tell you that the worst thing you can do in a volatile market is have an unplanned liquidity event, being forced to sell at a defined point in time just because you “need” cash. Make sure you have ample liquidity for the next 12-24 months. Your investment adviser should know of any planned liquidity events and include them in your financial plan. This will provide you better piece of mind knowing your plan allows for your short-term needs, and you will not be forced to sell long term investments.
#5: Capitalize on Opportunities
While we cannot control the direction of the markets, times like these do present good long-term opportunities. Reviewing your financial plans and determining practical steps are powerful ways to boost your strategy. Examples may include: considering tax-loss harvesting, rebalancing, changing asset mixes, adding to your investments (if you have excess liquidity), and performing Roth IRA conversions, to name a few.
Effectively navigating volatile situations and markets require sticking to clear and non-negotiable best practices, as listed above. Add in patience and endurance and that is a recipe for success.
Sources and Citations: “Schwab Market Perspective” by Schwab Center for Financial Research, Charles Schwab Institutional, September 2022; “Well, it’s a bear market, you know?” by Daniel G. Noonan, Savant, September 22, 2022 (paraphrased); “A guide for Investors” by Savant (paraphrased)