Recession! Bear Market! It's going to be ok
US stocks are on the edge of a bear market (a 20% decline from all time highs), the economy may be in a recession, and I knew I should send out a note because the Skimm is talking about it.
Just as we see few news articles about, “another tranquil weekend in the suburbs” but hear about every local crime, you may have missed the memo that stocks hit all-time-highs in 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, and 2021, yet you’ll certainly hear about stock market declines and recession fears in 2022.
To counteract that trend, here are my reflections for the week to set you at ease. Most importantly I’m writing to tell you that it’s going to be ok. We expect bear markets and recessions to happen periodically and built safeguards into your financial plan. By seeing the big picture and staying the course we can be better positioned to benefit from the next leg of economic and stock market growth when it comes. Here are 8 thoughts to consider.
The question we all face is, “Is now a good time to continue investing?” Historically, investing into stock market declines and economic recessions has been a great way to capture your share of the long-term growth in the economy. You don't have to time the stock market bottom or jump out and back in to benefit. Continuing to buy and hold is a sound strategy. This is because stock market expansions last much longer than contractions. Investing during a contraction can have a slingshot effect when the next expansion comes.
A “loss” in your account is only realized if you sell investments. Seeing a loss in an investment account is not enjoyable, but it is not a cause for action. You have the power. You get to decide when to buy and sell investments. Better options than selling in a panic include doing nothing and buying more. If you’re investing automatically each month (in a 401k or elsewhere) you’re already buying more. Great job!
We keep a cash reserve for times like these. A cash reserve provides reassurance that if you do need cash in the immediate future you don’t need sell your investments at a loss. Your reserve should not be invested in the stock market or in difficult-to-access investments like retirement accounts or real estate. I like Ally Bank Online Savings Accounts for this purpose.
This could be an opportunity. Excess money in the bank beyond a cash reserve or cash for near-term purchases can be strategically invested. This can be done all at once or over the course of months in a systematic way called “dollar cost averaging.” If you were kicking yourself for not investing during the COVID bear market or after the Great Recession, this is an opportunity.
Buffett is buying. One investor reducing his cash pile is Warren Buffett, who bought over $40 billion worth of stocks in the first quarter of 2022. He saw compelling value in the decline and famously stated that one way to successful investment outcomes is to be, “greedy when others are fearful and fearful when others are greedy.”
Inflation is a more durable risk to your wealth than stock market losses. We invest in assets like stocks, bonds, and real estate because they have historically beaten inflation, preserving your purchasing power in the future. While US stock market indexes have always recovered from declines to march to new highs, when cash loses purchasing power to inflation it almost never gets that purchasing power back (when was the last time Starbucks lowered prices?). Hoarding cash may be a winning strategy in the short-term but has historically been a losing strategy over the long-term.
While I expect the stock market to recover, some companies will not. Recessions and stock market declines fulfill a useful (but painful) function of culling zombie companies and reallocating financial and human capital for better causes. This is one reason a portfolio should be diversified, which reduces the risk of permanent loss of your entire investment. If you pick a company, cryptocurrency, or property that goes to zero, that money is gone and does not have a chance to recover. Many investors in “meme stocks” learned this the hard way over the last 6 months. A diversified portfolio can recover from losses because any one holding can’t wipe out your entire investment.
This is why you hired a financial advisor. These are the times where I can provide the greatest value by helping clients avoid big mistakes. I started Redwood Money to provide retainer financial planning because the success of a plan isn’t in the initial implementation, but in the month by month and year by year execution. If you feel concerned or have a question please call, text, or schedule time to meet.