Have stocks bottomed, or is this a bear trap? Since Mid-June, the Nasdaq has risen by more than 20%, which, by definition, is a bull market. However, the tech-heavy index is still down 16% on the year. On August 10, The Wall Street Journal declared a new bull market had arrived.  I hope they are right.
No one likes losing money, but some of the best market moves occurred during bear markets as sophisticated investors exploited anxious investors. For example, the Nasdaq has had a dozen moves where it climbed 3% or more this year and has made three runs where it jumped by more than 12%. Will this time be different? Have stocks bottomed?
The Nasdaq produced a measly 2.6% return from 2000 to 2014. From 2000 to 2002, during the Tech Wreck, it crashed by 75%, and during the Great Recession, it fell by 51%. A few months after the Tech Wreck began, the Nasdaq snapped back by 23% in April 2000 but fell 61% over the next 18 months before rallying again in April 2001. The index appeared to bottom in October 2001 when it climbed 35% but lost another 43% the falling year. The market recovered 150% from 2002 to 2007 but was still down 31% from January 2000, and it would not breach that level until 2014. The bear market lasted more than fourteen years, but the Nasdaq still delivered several significant up moves as it tried to recover.
Is the current rebound a bear trap or a bull market? I don’t know, but I do know that if you try to time the market by jumping in and out, you will eventually lose money regardless of the market’s direction. Typically, investors sell stocks as they fall and repurchase them after they have risen significantly. If they do the opposite, they might make some money.
Here are a few steps to help you become a better investor during bear markets.
- Develop a financial plan. It will keep you focused on your financial goals. I’ve noticed that individuals with a plan are less likely to panic and liquidate their investments when markets sour. Instead, they look for buying opportunities as stocks fall.
- Create three different investment buckets to meet your short, intermediate, and long-term needs. If you need money in one year or less, buy US T-Bills, and if your time horizon is three to five years, consider a mix of cash, bonds, and stocks. If your timeframe is five years or more, buy stocks.
- Buy the dip. It is challenging to buy stocks as they fall, but the market has always recovered. Identify quality companies or funds you want to own if the price drops.
- Rebalance your accounts. Our rebalancing software screens our models weekly, and if it finds portfolios that are off-kilter, it will rebalance them back to their original allocation. Rebalancing removes emotion from the buy and sell decisions because it is automated. In June, our models sold bonds to buy growth funds, which, so far, has proved correct. If you rebalance regularly, it will keep your risk level and asset allocation in check.
Media pundits and Wall Street experts love to call tops and bottoms, but it is impossible. Ignore people with megaphones on big stages telling you to buy or sell because they can lead you to financial ruin because they know nothing about your financial hopes, dreams, or fears. Focus on your goals, think long-term, and good things will happen.
The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has. ~ Jack Bogle
August 15, 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. My asset allocation is approximately 75% stocks and 25% bonds and cash, where it has been for the past thirty years or so.
 https://www.wsj.com/articles/global-stocks-markets-dow-update-08-10-2022-11660116855, Sam Goldfarb, August 10, 2022