By: 1 June 2022


This answer is not headline material and will never get me on CNBC or quoted in the Wall Street Journal. In fact, if I went on CNBC and said this they would probably cut to a commercial and never invite me back.

Admittedly, this is the short answer. There is a long version with more thought and detail.

The long answer is “Nothing Different.”

As outlined here, the behaviors that lead to successful investment outcomes for the long-term investor are the same when financial markets are rising as when they experience a temporary setback.

But while the actions (or inactions) that lead to successful investment outcomes are the same, they arguably take on an even greater importance during periods of choppy markets. It can be easier to “stick to the plan” when markets are rising and rewarding us. It’s not as easy to stick to the plan when markets are falling and all we see are declines.

What can seem like the safe thing to do – sell investments or seek out a different type of investment to reduce a specific risk – ends up being the riskier path for long-term investment success. It’s another form of market timing or speculating – both of which have historically spotty track records. But investments or actions considered to be a safer decision can develop a certain allure during times of market declines or other unexpected market dislocations.

The basic premise of investing is that accepting a certain amount of risk is rewarded proportionally in the form of return. This means that actions taken to avoid risk will also result in avoiding return. But an important factor to keep in mind is that risk doesn’t simply go away – it takes on different forms. Avoiding the risk of stock fluctuations also avoids the return from that risk. This brings upon the risk of not compounding wealth sufficiently to meet long-term financial goals** – often the more perilous risk for investors.

If you’re reading this you either already have a financial and investment plan to help guide you or are taking steps to develop one. So, you have the most important tools for success during markets like this. One, a projection that illustrates a path to successful long-term financial outcomes. And two, a diversified investment portfolio that reflects your circumstances to help you achieve your goals. These two, among others, make up the foundation of your “Bear Market toolbox.” All designed to ensure that come what may from markets, you’ll be ok.

What’s also worth mentioning is that all these tools include the assumptions of repeated Bear Markets on the path to long-term investment success. But that doesn’t make it any more enjoyable to see prices decline for weeks on end and it’s natural to wonder how long it will last and how painful it will be before it gets better.

Unfortunately, it’s difficult, if not impossible, to know what happens from here, but we can look to market history to give us an idea of probabilities. We are approximately five months into this decline and durations of similar past declines in the post-war era have averaged 14 months with a range of 1 to 31 months. So, we could be near the end or have more weakness from markets ahead.

But the good news is that when the decline reaches a bottom, stocks’ track record from that point forward is impeccable. Recovery tends to come swiftly and when we least expect it. Unfortunately, we don’t know when that will happen either, but based on past recoveries illustrated below, it’s not something we want to miss.

Fama French US Index

Thanks for reading.

*As of the time of this writing, we haven’t “officially” experienced a bear market as defined by a closing low of the S&P 500 that is 20% below the most recent peak. It reached its closing low (to date) of 18.7% on May 19th, but briefly dipped below the 20% mark the following day before recovering before close. So, saved from a bear market by a technicality. However, I would define a bear market more by how a decline feels, general market sentiment, and how broad-based is the decline. With many other indices down more than 20%, i.e. Nasdaq, Small Caps, Internationals – we can call this a bear market for sake of discussion.
**Of course most portfolios aren’t entirely invested in stocks, but they are the portion of the portfolio that is most responsible for long-term compounding of returns. Accordingly, it’s the portion of the portfolio also most responsible for fluctuations in value, often making it most subject to feelings of uneasiness when declines occur. These feelings of uneasiness stocks provide us with from time to time are why we’re paid so handsomely over the long-term from holding stocks.
Author Image

Matt Weier, CFA, CFP®

Director of Investments
Chartered Financial Analyst
Certified Financial Planner®

For information regarding our blog disclosures, click here.

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