As of market close on Friday, May 20, the benchmark S&P 500 index was down 18% from its highs on January 3, 2022, which is very close to “bear market” territory, meaning a 20% drop (which we actually touched briefly during the day’s volatile trading). The recent losses week after week and the drum beat of bad news can be dispiriting, and we recognize that seeing a loss in wealth is difficult. We urge you to remember the following investing basics:
Market corrections are normal – they happen from time to time.
Over the past 42 years we have experienced declines greater than 20% nine times and yet the market has returned an average of 9.4% over that same period. Volatility risk must be accepted to receive these long-term average returns.
Market corrections can be emotionally difficult - we get it.
No one knows where the bottom is, and it can sometimes seem as though bad news keeps on piling on top of itself. Something to keep in mind is that it is very common to experience what is known as “recency bias,” where our brains believe that the thing we are experiencing will continue into the future. For example, just ask an economist during a high inflation period what their expectations are for future inflation, and they will predict it will continue to be high; When inflation is low, they forecast low inflation far into future. Bad times do not last forever – the same is true for good times.
Markets recover.
It is a part of the process. Since 1950 there have been 15 bear markets. The average period from the peak to the bottom is just shy of one year (the longest was 2.5 years during the dotcom bust; the shortest drop was 33 days during the pandemic crash in early 2020). But the average time to recovery was 1.7 years.
And by recovery, we mean from the low point back to new highs. The longest recovery was 5.8 years and the shortest was just under three months. The point is that there will be a bottom and markets will recover. And most of the time, those recoveries happen within a reasonably short time frame.
Timing the market cannot be successfully done on a consistent basis.
While one might be tempted to time the markets, the best recovery days often happen in very close proximity to the worst days. Selling in down markets can ease your fears but getting back in can be very tricky. There is never a road sign that says “Today is the Bottom! Buy Now!” And once out, it might take months or years to feel enough courage to get back in. And by missing those key initial months you often miss the best days of the rebound, and your gains are forever reduced.
Yes, this time is different. But it’s also the same.
The future is always uncertain. There is never clarity. We often hear that “this time is different,” but it is always more similar than it is different to the last time the market dropped. In the long run markets work and will adjust to the current economic, social, and political environment.
Diversification in these times helps.
We continue to believe, despite some of the losses we have seen recently, that bonds in a portfolio have significant value as a stabilizing force. And the silver lining to rates going up is that those bond holdings are starting to earn more interest. We hold many different asset classes and they perform in different ways at different times which reduces volatility and hopefully provides some stress relief when you’re watching both the news, and your portfolio.
What are we doing behind the scenes?
We continue to watch for and take advantage of opportunities to rebalance out of the asset classes that have remained stable and into ones that have been hit the hardest. Rebalancing allows us to buy investments on “sale” and it can add materially to your long-term returns.
We also will continue to strategically “harvest” losses so that clients with taxable accounts can offset future gains (when we harvest a loss we sell one investment and immediately buy another comparable investment so that we are never out of the market; this way we are able to realize a loss in that first investment and use that loss to offset a gain at any time in the future – the losses can be carried forward indefinitely until they are offset by realized gains).
We’ve been through volatile markets like this many times before, and the best course of action is to stay calm, try to ignore the news headlines, and think longer-term than just daily/weekly/monthly. Just as quickly as markets can go down, they often quickly go back up.