A client recently expressed concerns about a coming decline in the value of stocks. She’s right to be concerned – we are entering the seventh year of rising market values. Since March 2009, the S&P 500 index is up 200 percent. This market climb is the fourth longest month-by-month ascent on record. The harrowing days of 2008 are becoming distant memories.
It’s a well-known fact that the market goes up and the market goes down. Stock values may be overvalued now and a sell-off seems inevitable, though it’s impossible to predict the timing of the decline.
Should you be concerned? Not really. The reality is that in any given five-year period, stocks will lose ground about one-seventh of the time. Translate: if you’re 50 years old now, you will most likely see several declines in the remainder of your lifetime. Acknowledging that bear markets happen is the first step to surviving them.
How can you survive (and even thrive!) during a market decline? With Endress Capital Management, you have a defined investment strategy. Sticking to your desired asset allocation gives you the opportunity to generate improved portfolio returns. During bear markets, shares of stock are “on sale” at lower prices. Through regular, disciplined contributions to your accounts and appropriate rebalancing from bonds to stocks, you can purchase additional shares at lower prices.
A steep decline in the stock market can be very difficult to ride out. But if you stay committed to your portfolio allocation, adding new contributions when possible and rebalancing when necessary, you are likely to generate decent investment returns over the next 10 years and beyond. You will do this by not selling your stock position during declines, but have the grit to use those sell-offs to purchase additional shares at lower prices.
The best thing you can do for your own peace of mind is to stop looking at your portfolio balance every day, or even every month. Try checking in on it once a year. The emotions caused by seeing “losses” on your statements might override the good investment strategy you’ve built. Human nature causes us to avoid pain, and you may think that selling off your investments can stem the pain of those losses. You will, however, feel that pain even more later if you bail out now.
Whether the next bear market happens two months from now or two years from now, you will have a choice. You can bail out of your strategy and investments and sell them prematurely (bad idea!) or you can embrace the opportunity and improve your position by buying stocks at better prices (good idea!).