The Nasdaq soared more than 12% in July, its best monthly return since 2020. Small-cap stocks, international holdings, and bonds also participated in the broad-based rally, providing some relief to weary investors. The markets are trying to recover from rising interest rates and persistent inflation, and since the near-term bottom in June, the Nasdaq is up 16.5%. Will the trend continue? Is it time to buy?
The Nasdaq was down 32% when it touched its June low, and if you panicked and sold, you may suffer from FOMO. Of course, no one knows what will happen tomorrow, but the recovery looks robust so far, particularly if inflation retreats and interest rates subside.
Let’s explore projected recovery times for portfolios with three different allocations and investment holdings.
- An evenly balanced portfolio of stocks and bonds, 50% stocks and 50% bonds, produced an average annual return of 8.3% since 1926.[1] If you keep this allocation, it could take about three years to recover your loss if you were down 20% to start the year.
- If you sold your investments after a 20% drop, it would take approximately twelve years to recover your loss if you only invested in US T-Bills yielding 2%.
- If you were down 20% and buried your money in a bank account earning 0.1%, you would never recoup your loss because it would take 224 years to compound your interest payments.
It’s tempting to call a market bottom and buy stocks, but no one knows when they will recover. And the market does not go up in a straight line. They fluctuate like the tide. From 1995 to 1999, the Nasdaq climbed 441%, generating an average annual return of 40%! Staggering! Despite the meteoric rise, it routinely fell 10% or more, and in October 1998, it dropped 30%. If you remained invested through the dips, dives, and drops, you enjoyed exceptional returns, but if you liquidated your holdings, your returns were significantly less.
If you sold your holdings these past few months, is it time to repurchase them? Let’s examine a few scenarios.
- Do not buy stocks if your time horizon is one year or less. Buy T-Bills or keep your funds in a savings account or money market fund.
- Is the money earmarked for a significant purchase like a downpayment, tuition bill, or new car? If so, do not buy stocks. Keep your money in short-term cash investments.
- Buy stocks if your time horizon is three to five years or more. Time wins, and stocks recover, so take advantage of down days to buy quality funds and companies.
- Are you working and contributing to your company’s retirement plan? If so, keep buying. 401(k) plans are an excellent tool for creating generational wealth because you buy stocks every two weeks regardless of the market conditions.
- Is your money invested in an IRA that you can’t touch for decades? If so, buy stocks.
- Buy stocks if the bear market is not impacting your financial plan or long-term goals. A financial plan is paramount if you want to succeed as an investor.
Our investment philosophy is to buy and hold diversified portfolios of stocks and bonds through low-cost mutual funds or ETFs because we don’t know when, where, or why markets will recover, and trying to time the market is a fool’s errand. It’s like getting on an airplane after it has taken off; it’s impossible. Rather than selling stocks when they fall, follow your financial plan, think long-term, and buy the dip.
Success is a result of consistent practice of winning skills and actions. There is nothing miraculous about the process. There is no luck involved. ~ Bill Russell
August 1, 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 you 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. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.
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. I like watching Shark Tank, and Wall Street was one of my favorite movies. I’m a Los Angeles Lakers fan, but I always admired the Celtics and Bill Russell.
[1] DFA Returns Web