June 15, 2022

Tough times don’t last, but a sound financial plan does.

A good plan can help you get through the worst of times.

Our main goal at EWA is to help ensure that clients can maintain their standard of living in different markets, and to have the peace of mind during various market conditions.

If the stock market crashes, if health concerns arise, or emergencies come up, a sound financial plan can help ensure these are simply discussions to calibrate your plan but will not derail your plan.

Our most important advice can be summarized as follows:

1.      No one in history has been able to exactly forecast the economy consistently.

2.      Equity markets cannot be consistently timed, and those that due are gambling (not investing). We prefer to plan and find the greatest long term returns with the lowest corresponding risk.

3.      An established way to capture the compounding returns of equity markets is to stay in and ride out market volatility. That means staying in even during bear markets which typically have a few similarities:

  •  Recur about once every 7 years.
  •  Can sometimes be rather significant and scary on paper.
  • Are historically always temporary.

4.      A real key to building long term wealth through equity investing is:

  • Staying patient
  • Having a plan in place and sticking to it but calibrating when necessary.
  • Being proactive over reactive. (Putting money in vs. out, converting to Roth, rebalancing to higher equity position if your plan allows)

Most recently, equity investors have seen their portfolios decline, but it is important to consider that a loss is only a loss if it is realized. And a sound financial plan should have several fail safes in place to help ensure that realized losses are minimized and strategically used for tax planning purposes.

Gaining perspective from history and current events can be helpful to stay on track with your plan.

The last 3 months have been filled with volatility in the equity markets due to factors like: the Russia/Ukraine war, the supply chain crisis, inflation, rising interest rates, and many other factors.

But circumstances are different now than the last 3 bear markets we have seen. A bear market is when equities drop more than 20%, which we have seen this week (S&P 500 is down over 20% year to date). The last 3 bear markets have been attached to a major event that causes a decrease in the market.

In March 2000, we saw a 49% drop in the S&P 500, leading to an 8-month recession, which ended after the 9/11 attacks. A major factor to this drop was from a bust in the dot com industry.

The next bear market that we saw started in October of 2007 and ended in November 2008. The S&P 500 dropped 56%, leading to the “Great Recession”, which was primarily caused by the housing market collapse.

Most recently, a short bear market occurred in February 2022 for 33 days and ended in March. There was a 34% drop in the S&P, which was largely caused by uncertainty around the COVID 19 pandemic.

The difference with the current bear market is that several events have led to uncertainty in equity markets. One of the main differences is how the Federal Reserve is influencing the economy through interest rates.

In the last 3 bear markets, we have seen the Fed lower interest rates to help stimulate the economy. In 2022 we have seen them raise interest rates, with more raises expected to come. Along with uncertainty around interest rates, the supply chain, inflation, and Russia/Ukraine are also influencing the drop in equity markets.

The similarity to the other bear markets will remain the same: it is nearly impossible to predict how equities will respond in the short term over the next 1-12 months, but it is likely that we will continue to see some volatility.

Historically, the average bear market has lasted 289 days (9.6 months), which is significantly shorter than the average bull market, which has lasted on average 991 days (2.7 years). But a bear market does not always lead to an economic recession (as we saw in March 2020). There have been 26 bear markets since 1929, and only 15 recessions.

Typically, an investor’s gut reaction is to sell out of equities and flee to “safety” (cash or fixed income) to make sure that their assets do not drop any further, but this could be detrimental to your plan long term. Keeping money invested in equities, even in a bear market, is the recommended stance because:

1.Many stocks pay dividends, while interest on cash/ fixed income remains very low.

2. Equity investing is a lifetime journey to building wealth

3. The house wins:

  • Be the house, by staying in the market.
  • Timing is proven to be catastrophic as you have to time right out and time right back in (statistically this would be playing a game with less then 25% chance of winning when looking at the SP 500 index).

But remember, winter is followed by spring, which is historically also the case with the stock market. Bear markets have historically always been followed by bull markets. Let’s look at the recovery that occurred in the S&P 500 12 months following the last 3 bear markets.

1.Following the dot com bubble the S&P recovered 34%.

2. Following the 2008/2009 financial crisis, we saw a 69% increase in the S&P 500.

3. And the March 2020 bear market was followed by a 78% increase in the S&P 500.

The stock market is where wealth is transferred from impatient investors to patient investors, who can withstand the bear market. It is important to make sure your financial plan has the correct fail safes in place to be patient during a bear market.

If you are a retiree, it is wise to have safe assets as part of your balance sheet that can be accessed for income needs to avoid relying on equities.

If you are a younger investor, you most likely have a long-time horizon until you need to access your investments but should have “safe” assets for any short-term liquidity needs or planned purchases.

Many news outlets and media sources will focus on creating fear in their headlines by over exaggerating the market drop, otherwise known as “click bait”. They profit when they catch your attention and time.

But remember, this is a normal bear market, and proper financial planning will help ensure you get through it.

This graph puts it perfectly. It’s not about timing the market but about time in the market.

A more dangerous factor in equity investing is missing the good days (not riding out the bad days).

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Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.

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Securities and advisory services offered through EWA LLC dba Equilibrium Wealth Advisors (a SEC Registered Investment Advisor).
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
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