During times like what we saw in the 2022 Bear Market it can be tough to think ahead to when things recover, and the losses might turn to gains. When the market is in a down cycle, and eventually reaches the Bear Markets level of (-20%) the mentality can permeate through investors that things just won’t get better and we are not going to recover the losses. Throughout the history of the markets and the economy we have seen that things tend to recover, eventually. It will likely not happen overnight, historically the markets and economy have recovered from the downturns. Don’t think that losses now will be losses forever.
On the other side, when the markets and economy are doing extremely well people can tend to get into the mentality that things just keep going up and the good times will just keep on rolling. This can be a dangerous way to think of the markets and the economy because upcycles have their expiration dates as well. Things can go very well for a period and eventually there is a peak, after that peak comes a downturn. How deep will that downturn be? Only time can give you the answer to that question. Don’t think that gains now mean gains forever.
When looking at your financial plan and the overall goals you might have it can be important to keep in mind that you should ‘Think Ahead’ and not think the current cycle will last forever.
When you are experiencing a Bull Market, think ahead to the likelihood that it will not last, and a downturn can come sooner or later.
- After the 2008 Financial Crisis there was a long, over a decade, Bull Market run. From March 9, 2009 until February 19, 2020 the S&P 500 saw a cumulative return of 401%.
- During this time there were periods where the markets went through struggles, but these struggles were not prolonged and there were not very many periods where growth was in question.
- During these market runs that you might start to think ‘the market just goes up!’
- This mentality can be dangerous because time has shown over and over again that the market goes up, and down!
- It is good to think ahead to the fact that eventually the downturn is going to come, and think ‘how can I be prepared for this when it happens?’
- When you don’t think ahead and live in the ‘market only goes up’ mindset you might make decisions based on that mentality, and in the long run put your financial picture at risk. You take too much risk because you want to get that maximum return and forget that managing risk is better for you long term.
- By taking the time in your planning to think ahead for that next cycle you are helping yourself make decisions for the future, not the here and now.
When there is a Bear Market, think ahead to the recovery and understand the losses aren’t likely to go on forever.
- During this most recent Bear Market in 2022 you might have had moments where you think ‘this is never going to get better’ and ‘it is time to just give up on investing.’
- This mentality can be prevalent during Bear Markets. The losses continue to come, and you have a difficult time seeing that this has only been happening for a period of months. Those months can feel like years during the tough times of a Bear Market, but the probability is that, eventually, things will recover.
- By thinking ahead to the recovery, you can help yourself from making the mistakes that many people make by selling out of their portfolios, going all fixed income, and missing the opportunity to recover the losses and keep your plan moving forward.
- It is good to think ahead to the recover and think ‘how can I be better prepared for when this happens?’
- By taking the time in your financial plan to look at the eventual recovery of the portfolio you can work to make adjustments that will help you both now and in the future.
Overall, the main thing to keep in mind is that it is ok to look at and assess the current cycle, but it can be detrimental to your long term success if you never take time to think ahead in your planning. The more you plan for the next cycle the more you can be educated and empowered to make informed decisions about your financial future.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.The opinions expressed in this material do not necessarily reflect the views of LPL Financial.
The examples are hypothetical and are not representative of any specific investment. Your results may vary.
eMoney 103: Data Input – Asset Allocation
In the ninth class of eMoney Masterclass 103 our CEO Greg Furer reviews how to input savings, contributions and withdraws into your client’s financial plan.
