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The stock market opened on March 9th plunging 1800 points. Here are some insights on where we go from here.Submitted by Watters Financial Services, LLC on April 8th, 2020
When the stock market opened on March 9th, the Dow Jones Industrial Average plunged 1800 points on the opening. That was the official start of the bear market that we are living in. Investors have been whipsawed by market swings ever since. At this point, the biggest risk for investors is that those losses will lead people to make moves that will cause even bigger losses.
Research in the field of behavioral finance has found that losses hurt twice as much as gains feel good, even when the potential loss is relatively small and doesn’t pose much risk. We are simply wired to hate a portfolio full of red ink. It is easy to lose sight of the big picture and to only focus on recent events, even if it significantly reduces your long-term investment performance.
Here are some time-tested things to remember during a bear market:
1. Stocks go up far more often than they go down. According to the DFA Matrix Book, between 1926 and 2020, over 73 of the years had positive returns. It is easy to lose sight of that when you’re in the middle of a bear market.
2. Of the negative returning years, you can count the number of calendar year based bear markets on two hands. According to the DFA Matrix Book, there have only been 7 years with a loss of over 20% (bear market). That is only 8% of the years between 1926 and 2020.
3. Rebalancing is important during bear markets. No one can correctly predict the top or the bottom of a Bear Market. Therefore, periodic rebalancing during a bear market makes so much sense. You’re buying stocks when they’re cheaper and selling off bonds to bring you back to where your portfolio model should be.
4. The lower the current price on the stock market, the better the long-term opportunities are in the stock market. Remember the lessons that can be learned from the Forward Price to Earnings Ratio. Please contact us if you would like to see a slide from JP Morgan‘s Guide to Investments that looks at the recent history of the Forward Price to Earnings Ratio and the subsequent five-year annualized returns. The lower the Forward Price to Earnings Ratio goes, the better the subsequent returns. As of March 31, the Forward Price to Earnings Ratio was at 15.4 times earnings. In February, the forward price to earnings ratio was over 19. Thus, stocks are more attractive now.
5. There is a reason you have a diversified portfolio model. Bonds help dampen volatility. I can send you a slide from the JP Morgan Guide to Investing that shows how deep the declines were in 2008/2009 and how fast the recovery took place for different portfolio models. Just reach out if ou want to see it.
We all need patience now. That is something in short supply. Please reach out to us if you have any questions. We can help you look over your cash flow expenses, review your liabilities, insurance policies and your estate planning and to discuss your portfolio model. We want to be a calming voice for you during this troubled time.