By: Reed C. Fraasa, CFP®, AIF®, RLP®
As of Friday, the 29th of July, except for the NASDAQ market, the US equity markets recovered somewhat from the bear market correction. A bear market is a loss of 20% from the previous high. In the first six months of 2022, the equity market had lost over 80% of what it gained in 2021 and entered a bear market correction.
June and July are a tale of two months. June was one of the worst months for stocks and bonds this year, and July was one of the best months in the last two years. After five down months, June was the breaking point for many people who felt they could no longer tolerate the volatility. Unfortunately, leaving the stock and bond markets in June meant missing out on the bounce for both in July.
Personally, at the end of June, my portfolio was down year to date by more than 15%. I did not like it, but I have been here before, and I know I will be here again in the future. Although the losses make me uncomfortable, I know I need to be in the market when it goes down because I want to be in the market when it goes up.
Our firm has been tracking the performance of our portfolios with portfolio accounting software since mid-2001. During those 20+ years, I have personally racked up about 140% in cumulative losses in my portfolio. That is a considerable number. How can someone lose more than 100% of anything?
The answer is that during the same 20+ years, I have also cumulatively gained much more than I have experienced losses. These numbers reflect that, on average, I have realized about one down year every four years. My experience is like the long-term average for the US stock market. Historically, the stock market is typically down about 25% of the time and up about 75%. This has been true for the stock market for the past 90+ years.
For over twenty years, I have never gone to cash to avoid a loss, so I never needed to time when to get back in the market. That is important because most recoveries typically include a few critical days when you must be in the market following the stock market corrections. It is easy to avoid a loss but exceedingly difficult to know when to get back in.
I started my career as a broker in 1990. I sold products to the public, and every time there was a disruption in the stock market and clients were nervous, it was an opportunity to trade and sell more products to generate a commission. I got my CERTIFIED FINANCIAL PLANNER™ designation in 1993 and began practicing financial planning for myself and my clients. In 1998, our firm stopped selling products to earn a living and started selling advice and financial planning to help our clients make better decisions. This was the best decision in my personal and professional life.
I am convinced that what differs for our clients is financial planning.
When you have a financial plan, you can weather stock market corrections, inflation, and recessions. As a financial advisory firm practicing financial planning for our clients, we believe the investment portfolio is an engine that will run and be the resource to enable you to live out your goals. During the accumulation phase of your life, you buy components for your engine. You buy those components at a discount when the stock market is down.
Ideally, you should have your engine built when you transition to independence and no longer work to make a living. From that point on, distribution income planning, a sub-set of financial planning, is the thing that will enable you to live your life without fear. The portfolio engine will continue to be the resource to help you meet your goals, and that engine needs to continue to run intact.
When the news around us is overwhelmingly negative and alarming, it is hard to stick with a plan. Our brains are wired to look for threats and run away when we cannot fight. Our investment plans are no different – we will feel a powerful desire to sell and run. During these challenging times, try practicing these habits:
Stop watching the news during the day, especially CNBC or Fox Business News. Instead, choose a time of day when you will watch any news and only watch for 30 minutes to get a quick update.
Don’t watch your portfolio every day. Check-in on our client portal to monitor your portfolio at most once a week, but monthly or quarterly is even better.
Take a walk whenever you feel anxious. A lot of research shows that any amount of exercise is the best treatment for anxiety.
Volunteer to be of service. Again, research shows that we feel better about things when we step out of our world and help people.
Read a book on finance instead of watching financial news or social media.
Call your financial advisor and ask to review your financial plan in light of the current economy or market correction. This assumes that your financial advisor has a solid financial planning process.
The world is not falling apart. Things will get better. If you don’t have a financial plan, call us. We would love to talk to you about your goals and concerns.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.