Investors watching the financial markets or news reports recently have likely heard there-emergence of the term, “bear market”, in reference to recent stock market volatility. Naturally, this has prompted questions about what exactly the term means, and what the implications could be for investment portfolios.
A bear market is defined as a drop of 20% or more from an index’s most recent high. Conversely, a bull market is when an index rises 20% or more from an index’s recent low. So by those definitions– as there is some variance in the industry as to when the terms are used– a particular index is always in either a bear or bull market.
However, because the use of either bear or bull is based solely on past market activity, it is important to note that it indicates nothing about the future market direction. Granted, the emotional impact of a falling or rising market could generally lead investors to believe the current trend will continue, and the “talking heads” in the news will lean in to these emotions and reinforce the fear or greed investors are feeling at the time.
But the volatility the markets are currently experiencing is not unexpected, or even unusual. The third and fourth quarter of 2018 saw similar market activity, driven by concerns over actions of the Federal Reserve and geopolitical relations with China (sound familiar?). The first quarter of 2020 saw much more significant market drops as concerns mounted around a mysterious virus that was rapidly spreading around the globe.
In both cases, the volatility passed and the market had surpassed its previous highs in less than1 year. So should we expect the same outcome this time around?
Not necessarily. Stocks could keep falling . . . or the recovery may have already begun. The markets could take a while to recover . . . or the recovery could happen rapidly, as was the case in the previously mentioned scenarios. The reality is that no one knows what the market will do over the coming months and years, which is why attempting to time the market ups and downs generally proves counterproductive.
Our advice to clients is to always maintain a diversified allocation that supports your long-term objectives and allows you to stay the course and ride out the volatility, without panicking or losing sleep. For retirees, having at least 5-7 years of cash needs set aside in conservative investments is the preferred course of action, as this allows plenty of time for stocks to recover, and avoids the need to liquidate investments at an inopportune time.
We also believe volatility creates opportunities. For those with available cash, it is a much more favorable buying opportunity than we have seen in some time. For those with non-qualified investments, we will be evaluating opportunities for tax loss harvesting, selling investments that have lost value and dropped below their cost basis and deploying the proceeds into investments with similar or greater upside potential. And our investment team is diligently evaluating changes that may be merited in our clients’ portfolio in light of the rapidly changing market conditions.
We value the trust you have placed in our team and welcome your questions or concerns. Please do not hesitate to reach out.
Article written by:
David Munn, CFP®
President
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels. This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. 1323GLX