It has not been a lucrative year for the stock market. The S&P has fallen for a whopping 10 weeks out of the past 11. The Dow closed below 30,000 for the first time since January 2021.
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If we turn to historical data for insight into the future, things don’t look much more optimistic. According to Goldman Sachs strategist Vickie Chang, the S&P 500 has dropped below 15 percent a total of 17 times since 1950. On 11 of those occasions, the stock market bottomed out only when the Federal Reserve indicated it would loosen monetary policy.
As we currently head toward bear market territory, the Fed has given no indication of doing so. Indeed, the Fed plans to continue raising rates into 2023.
What does this mean for investors? For those investing in the S&P 500, their portfolios are worth the same now as they were in early 2021. Concurrently, inflation has continued to rise, further exacerbating any portfolio returns. This begs the question: as the markets continue their tumultuous behavior, what should you do?
Panic Helps No One
Panic rarely, if ever, improves a situation. Investing is no exception. It’s important to keep a level head and stay objective.
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If you are working with an advisor, be direct with them. Ask about their plans for the future and find out how current events change things for them, if at all.
If you do your investing on your own, avoid being emotional and subjective in your decision-making. Certainly, the stock market is not great at present. However, any drastic decisions you make now could severely impact your portfolio, for the foreseeable future.
There is no single right or wrong answer. It all depends on the person and their situation. Regardless of the direction you decide to take, make sure your decision is a calculated one.
What Investment Stage Are You In?
There are different stages on everyone’s investment horizon. A young professional working at their first job out of college will be in a completely different ballpark than someone in their late fifties. When an economic downturn occurs, it is important to remember this.
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If the S&P and other indices continue to fall, and with negative annual returns in the double digits, investors planning to access their money in the near future may want to consider more conservative strategies.
Let’s say you are planning on retiring in two years and your portfolio loses 20 percent for the year, dropping from $400,000 to $320,000. The stock market will almost certainly correct itself at some point. The question you should ask is whether it will do so in a suitable timeframe for you.
If you want to retire with at least $300,000 in your portfolio and you are still above that mark despite your losses, it may not be advantageous to continue investing in volatile funds so close to their distribution stage.
However, younger investors still in their accumulation stage—and not needing liquidity in the near future—can probably ride out this storm. What the younger crowd lacks in principal and prosperity from decades of compound interest is made up for by the decades still ahead of them. Their portfolios can take a hit and bounce back. There is plenty of time for them to meet their goals.
For those whose advisors are using Riskalyze, now would be an excellent time to reevaluate your risk tolerance with a risk assessment. To be clear, this is not a paid advertisement for Riskalyze. I recommend tools and strategies within my realm of experience. When I was an advisor, I worked for many years without this tool and for many years with it. I strongly preferred the latter, as did my clients.
Will the Stock Market Recover?
The future is speculative. We can make educated guesses—and some are more qualified to do so than others—but ultimately no one knows what the future holds.
On the other hand, while the past is not always a blueprint for the future, it can shed a little light.
Since the end of World War II, there have been approximately 14 bear markets. On average, it takes roughly 23 months to recover. This is an average based on historical data, but the upswing could take a shorter amount of time or a longer one.
In less optimistic news, a bear market is often followed up by a recession, although this is a difficult thing to predict.
In more optimistic news, all bear markets eventually lead to a longer and more robust bull market. This is hardly new information, but rather an observation of data from similar economic activity in the past. Based on past experience, we know it is likely that the stock market will eventually correct itself.
The question to ask is not about “if” but “when.”
Plan and Take Action
Whether you are buying the dip at a fortuitous time, or have picked the right moment to bail, everything comes down to timing. And not just timing, but planning as well.
If your portfolio can afford to take a hit and there is ample time for it to recover, you may not need to change much. If you are close to retirement and your portfolio is sufficient enough to cover your living expenses once you retire, is it worth taking a risk by investing in volatile funds?
Start by asking yourself what amount of your portfolio you can lose without undergoing a major lifestyle change when it’s time to distribute. Then ask how much of your portfolio you would have been comfortable losing before you started to panic.
Where is the red line for you?
The first question is objective; the second is much more subjective. Your answers do not necessarily have to align. However, considering these questions will give you insight into where you currently stand, and in which direction you should be heading.
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