Stocks are off to a rough start. The NASDAQ is down 10%, and several companies have fallen significantly, including Facebook, Spotify, PayPal, and Etsy. It’s a brutal tape.
1990 was my first full year in the investment business, and the S&P 500 lost 6.5%. I thought my career was over because a few friends and family trusted me with their money, and I let them down. I felt horrible, but the market recovered, and by 1993 the index was up 32%.
In 1994, the Federal Reserve raised interest rates from 3.25% to 5.5%, and everything fell. Though the S&P 500 only dropped 1.5%, it felt like a major correction. However, the S&P 500 recovered, and from 1995 to 1999, the index soared 220%.
The Tech Wreck crushed the market from 2000 to 2002 as the S&P 500 fell 40%. It was my first full-blown bear market. The dot.com era ended with a bang as valuations soared to unattainable levels. It was a long two years, but, once again, the index bounced back and climbed 67% from 2003 to 2007
The next blow occurred during the Great Recession, where the S&P 500 declined 49% as investors reacted to extreme levels of mortgage debt and a few high-profile investment firms that collapsed. After the crash, the market rebounded with authority and jumped 224% from 2009 until October 2018 before it fell 14% a couple of months later. The index did rally again and rose 29% from 2019 to February 2020.
COVID-19 ended the bull run with a thud as the S&P 500 fell 34% in March 2020. The decline is still fresh in many minds, mine included. But, from the March 2020 low, the index ripped higher and climbed 93%.
Here we are again, and the market is falling, worried about Russia, inflation, the Federal Reserve, and rising interest rates. Will it recover? I believe it will, but it could take time.
Emotionally, stock corrections are unsettling, and no one likes to lose money. I get it. I have enough data to choke a horse and can access hundreds of years of information for stocks, bonds, interest rates, inflation, etc. But facts don’t matter when stocks are falling – emotions surpass facts as fear rises. I could show you reports where stocks averaged a 10% return since 1926 and made money 75% of the time. I have additional reports showing stocks outperforming bonds by a ratio of 53 to 1. And more data showing US T-Bills have never lost money and averaged 3% per year, but so has inflation, so your net return has been zero![1]
Peter Lynch said, “Everyone has the brainpower to make money in stocks. Not everyone has the stomach.” Corrections are gutwrenching, especially as you watch your assets erode. According to AMG, the average bear-market decline has been 39%, lasts about 1.3 years, and occurs every 7.7 years. Also, time wins. The S&P 500 has never lost money over 20-year rolling periods.[2]
Here are a few ideas to help you if the stock market keeps you down.
- Review your time horizon. If you don’t need money for five years or more, stay invested in stocks. However, if you need your money in the near term, invest in cash or short-term bonds that won’t lose money during a stock market correction.
- Diversify your holdings. If you only own US large-cap stocks, consider adding small-cap and international stocks. Also, add bonds, real estate, or other asset classes to reduce your risk level.
- Reduce your stock allocation. If your stocks keep you up at night, lower your allocation to your sleeping level.
- Don’t panic. Stocks recover. Recoveries may take weeks, months, or years, but they’ve always rebounded. Will this time be different? I don’t know, but I like my odds if history is my guide.
- Rebalance your accounts. As stocks bounce up and down, your asset allocation is likely off-kilter. If so, rebalance your account, so your risk level and allocation remain intact.
- Follow your plan. A financial plan will help you during the down days. If you don’t have a plan, it’s like flying a plane without a GPS.
I know market corrections are difficult; I’ve seen too many, but I believe in the long-term trend of the American economy and the stock market.
Follow your plan, focus on your goals, diversify your assets, rebalance often, think long-term, and good things will happen.
Is there nothing I can say, nothing I can do to change your mind? ~ Rolling Stones
February 3, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
[1] DFA 2021 Matrix Book
[2] Keep Calm and Remain Diversified – Principles of Investment Success 4Q 2021 AMG