BLOG: The Bear Returns
Last week, the Bear made his appearance on Wall Street. A Bear Market is typically when the market retreats 20% from its high point. As of this writing, the Nasdaq has declined 22.7% from its high and, while the S&P 500 and Dow Jones Industrial Average haven’t declined quite as much, both indexes seem poised to do the same. For long-term investors, this has always been a normal function of the markets.
The primary function of financial journalism, however, seems to be terrifying us out of ever achieving our financial goals by shrieking about the market’s volatility. We’ve been reminded of this almost hourly as the S&P 500 approaches “official bear market territory.” The one item they usually leave out is that this is a routine part of long-term investing.
Every market decline of this magnitude has its own unique precipitating causes, and the current episode seems to be a response to the tariffs that the Trump administration announced Wednesday. Of course, this is unsettling for most people as they see their portfolios drop in value.
But the important thing to remember is that, while this current crisis seems new, it’s quite commonplace in history. Just three years ago, for example, a similar decline in the markets occurred due to government policies. The blame was placed on the record-high inflation caused by missteps by the Federal Reserve and the Biden administration. That unsettling event eventually ended, and the markets went on to achieve new highs. I can name several other similar events that have happened in just the past 25 years but, rather than bore you with those details, I’ll simply point out that all of those events eventually ended and the markets went to new highs.
Markets don’t like uncertainty and, when uncertainty appears (often by change in government policies), markets tend to react badly. But it’s important to remember that we invest in companies, not the government. The companies we invest in are among the largest, most innovative, and resilient companies in the world. These companies have grown because they have been able to adapt to and thrive through different administrations, subsequent policy changes, and various crises. We invest in these companies because we have seen, repeatedly, that the best-run companies overcome obstacles and rise to new heights and higher earnings. To think this won’t be the case in the future is ignoring the history of American Capitalism. Or, as Warren Buffett put it during the Great Financial Crisis, “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”
As for responding to the current crisis, those of you who have been with me for a long time know I generally suggest two ways to handle a market drop: add to your investments or do nothing.
Right now, you’re able to purchase more shares of investments than you were able to last month for the same dollar amount. For example, $10,000 invested in SPY (a stock that mimics the S&P 500 Index) on March 7, would have purchased 17.36 shares. As of the market opening on April 7, that same $10,000 would have netted you 19.79 shares. Both purchases, down the road, will likely be higher. But the block of shares you purchase today, at a cheaper price than last month, will be worth more because you bought it cheaper and obtained more shares.
If you’re not able to add to your investments, doing nothing is also effective. While we have no idea when it will happen, this latest crisis will eventually end.
One common question I receive is, “wouldn’t it be better to sell now, then buy back when the market settles down?” This is known as “timing the market.”
In my many years as a Financial Advisor, I’ve counseled my clients that timing the markets doesn’t work for the simple reason that, to be successful, you need to be right twice. First, you need to be right that the market will continue to decline (it might not) and that it’s time to sell. Second, you need to be right that the market has hit its lowest point, and that it’s time to buy back in. Nobody has ever been able to consistently do both, and it’s imprudent to try.
Let me be clear about the most important takeaway from all this: for long-term investors, capitulation to a bear market by selling out has often proven to be a tragedy from which their retirement plans may never recover. Our investment policy is founded on acceptance of the idea that the only way to be reasonably assured of meeting our long-term goals is to ride out the occasional declines in the market, even when they seem like they’ll never end.
My mission continues to keep you from making a mistake by selling investments due to a temporary crisis and missing the next market rally.
I continue to advise staying the course and, as always, please contact me if you have further questions.
Regards,
Joe
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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 referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing includes risks, including fluctuating prices and loss of principal.