One constant of being invested in the financial markets is that the stock market experiences periods of volatility. 2022, as it turns out, is no exception. As of June 13, 2022, the S&P 500 Index officially entered bear market status1. A bear market is when a market index (S&P500 and/or Dow Jones Industrial) is down 20% from a recent closing high (and in this case the S&P 500 was down from January 3, 2022, to June 13, 2022). Bear markets are normal and are to be expected. In fact, since WWII there have been 13, including the current one2. Listed below are some of the reasons that have caused short term market volatility and have led to a bear market.
- Fear of Recession
- Geopolitical events
- Rising interest rates
- Pandemics
- Inflation
- Mortgage collapse
- Oil embargo
The natural question is, should we stay invested when a market is experiencing such volatility? A lot of people get burned by deciding to get out of the market because the sell today means you need to buy back in at some point in the future, but when? If you are nervous now, will you buy back when its down another 5% or 10% or up 10%. Long term statistics remind us that “time in the market” is what counts and not “timing the market”. The percentage of stock market days up in a 50-year period from 1951- 2021 is 53.7%. The percentage of stock market days down over the same period was 46.3%3. The up and down days are almost equally split. Those kinds of odds would be almost like flipping a coin. Moreover, in the past 20 years, seven of the 10 BEST days in the market happened within just two weeks of the 10 WORST days4. This all leads to the conclusion that its extremely difficult to predict the short-term direction of the market. Is that something that’s worth flipping a coin over?
Excluding the current bear market mentioned above, the following chart illustrates the previous 12 bear markets and the subsequent performance of the market after one month, three months, six months and one year following its declaration. This chart illustrates that in most cases the long-term investor is rewarded by being patient after a bear market has been declared.
When zooming out from the current market cycle and taking in some perspective from previous bear markets (and your financial plan’s probability of success!), making emotional decisions regarding your financial well being can cause tremendous long-term harm. If you’re feeling nervous about the state of the market, don’t hesitate to schedule time with us to discuss. Let’s get your plan brought up to date and look at the long term before making a knee jerk decision in the short term.
Schedule here: https://definedwm.as.me or give us a call!
Sources:
1 Wall Street Journal;
2 Dow Jones Market Data
3 Crestmont Research
