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What to Consider If You Are Worried About a Downturn in the Stock Market

Drew Barnes, CFP®
July 5, 2018

The stock market can be volatile and unpredictable at times, and even seasoned investors can be caught off guard by sudden shifts. To make matters even more difficult, we are constantly inundated with negative headlines and forecasts from the media and even from our friends, family and colleagues. The constant barrage of negativity can make it difficult for investors to tune that out and stick to a prudent, well-designed and time-tested investment policy. Instead, it may lead investors to prefer staying out of the market altogether or trying to time the market when they fear a crash is imminent.

There are two educational pieces that I think you may find interesting, helpful, and reassuring. The first piece, by Hartford Funds, describes the negative effect that news outlets have on investors, while also highlighting how strongly the markets have performed the vast majority of the time despite the “doom and gloom” headlines. This Hartford piece shows the dangers of letting the negative sentiment drive our investing decisions.  The second piece, by Franklin Templeton, explores each decade of the stock market, the “crises” that we faced, and how the markets have overcome these obstacles.

Our experience with market timing is that it does not work consistently and can dramatically reduce one's returns.  This is why we do not provide advance recommendations to move money in or out of the market if signs “appear” to warrant the moves.  We take the humble approach that we do not know for certain when the markets will experience sustained declines or increases.  To illustrate why market timing is such an unreliable strategy, on average, the stock market (the Dow Jones Industrial Average) experiences (approximately) the following declines at the following frequencies:

  • Decline of 5% or more 3 times per year *
  • Decline of 10% or more once a year *
  • Decline of 15% or more every 3 years *
  • Decline of 20% or more every 6 years *

With such frequent declines, it may seem like something bad is always coming; yet the market has always had a positive trend over the long term and all declines have been temporary. The two worst stock market declines that our country has ever seen (the Great Depression and the Great Recession) have taken roughly 4.5 years to fully recover after reaching their bottom levels.  It’s important to note that this was the recovery time if your portfolio was comprised of 100% stocks (which is something we do not recommend to our clients).

A broadly diversified portfolio, however, should experience lesser declines and much faster recovery times. Trying to time the market is incredibly difficult because you have to be able to guess correctly twice, every time the market changes. You have to be able to predict when to get out at the right time and then when to get back in at the right time, time and time again. Even if investors had gotten out of the market at the right time prior to the Great Recession, they would still have to be willing to get back into the market after it had just declined by 50%. If someone was panicked enough to get out of the market due to fear, it is very unlikely that they would feel confident enough to get back into the market after such a massive decline.

A theme that runs through all of the decades of stock market history is that – no matter what the headlines say – investors should continue to focus on the fundamentals and understand that markets will fluctuate. At M.J. Smith & Associates, we work with clients to establish a clear set of goals and objectives for their financial plans and use those as a blueprint to evaluate all investment decisions. Our company philosophy is to never time the market, mitigate decisions driven by emotions (fear and greed), and manage investment risk through broadly and globally diversified portfolios that are built to help achieve our client’s goals.  We do not let the negative headlines, or “noise,” dictate our decisions.

If you’re interested in M.J. Smith & Associates reviewing your portfolio and/or discussing options to help you understand the impact of your investments, please contact us today and we’d be happy to talk with you.

 

 

Past performance does not guarantee positive results. Loss, including loss of principal may still occur.  The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.  Diversification and asset allocation do not ensure a profit or protect against a loss.The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Drew Barnes and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors.

*https://www.americanfunds.com/individual/planning/market-fluctuations/past-market-declines.html

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