How Should You Deal With a Bear Market? | Luminary Financial Advisors
Investing(00:00):
Hi, I'm Warren Burger. I'm the owner of luminary financial advisors. And today I want to talk about how to deal with the bear market. As we sit here in may of 2022 we've had a really volatile few months. And as of last week, we, the S and P 500 officially went into bear market territory. And a lot of people are worried about their 401k, their investments. And I just wanna talk a little bit about how to avoid making emotional decisions and a little bit of the history of bear markets and how that might influence your decisions as you move forward. But before we get going, I just have to bring up the fact that this is not considered to be investment legal or accounting advice. This is really just for educational purposes, and hopefully it's something that you can take on your way, talk to your professionals, your financial advisor, and make sure that anything that we talk about here works for your particular situation.
(00:55):
So let me first start talking about the history of bear and, and bull markets. And so I have a great chart here that really shows from 1926 through through December of 2021. So it's not really capturing what's going on right now, but it's really showing historically how we've had bear markets in bull markets. And if you see on the bottom of the line in red, you're seeing the the bear markets in terms of the percentage of loss in those bear markets, and also the duration, how long those bear markets lasted. And you'll notice that, you know you know, around the 1930s, right after the the great depression and during the great depression, you, you see really you know, 80% losses over 27 months, that ends up being the, the greatest losses that we've seen in this timeframe.
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But if you really look over over the history from there on you see most of the time, it, it doesn't last more than anywhere from 19 to 22 months. And, and if you look at the bull markets on top in blue, you're seeing that not only are the, is the duration of the bull market after a bear much longer than the bear in almost every circumstance, but you're also seeing the percentage in gains and the fact that you, you see sort of an exponential percentage in gains after these bear markets. So this is just to give you some context as we sit here and everybody's wondering what's gonna happen next and how long this is going to last, if history is a guide and, and we, and we can't predict what the future is going to be, but if history is a guide we should come out of this at some point and really look to capitalize on staying invested in the market.
(02:48):
So I just want to give another show another chart here that shows the average annualized returns after a market decline of more than 10%. And essentially what this is saying is like, Hey, for, you know, in the year that you had these greater than 10% declines O on average, you were looking at an 11.4% gain a year afterwards. And then if you look three years and five years down the line, you can see here, 10.3% after three years, 9.6% after five years. So, you know, staying invested in the market, not not panicking and selling out of the market in, in a, when it's down, there's a real opportunity to stay invested in the market and capitalize on the gains that happen as we've seen in the past, after we've been through these bear markets.
(03:40):
So this is just a little bit of a chart that kind of shows how investors on the whole end up viewing their, their relationship with the markets. And if you see here, what we start with is the, you know, a set and, you know, depending on where we're at in this cycle, but this cycle repeats itself often. And we start out with a sense of optimism about the economy the economy's growing people are doing well. It slowly builds to the point of elation where, which is where we were fairly recently, where, you know, everyone is talking about the next big thing in the markets. And I think you'll find, you know, when, for instance, some of the things that happened with game stop or, or some of these other stocks that they, they were calling meme stocks where you had individual investors that were sort of grouping together to buy these stocks.
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You know, that was part of this whole elation. I, I always talk about when you hear the Uber driver talking about the next stock to buy we're, we're probably in for some change. And I, and I think that's where we find ourselves now that we've really come off of that elation, we're into this sort of nervousness and fear period because of the high inflation that we're seeing the downturn in the markets. And this is where you know, in that elation phase, we find a lot of people buying into the stock market, right? They're hearing about it everywhere. And they're saying, Hey, we, we, we need to get involved in this. And, and so you'll see emotional decisions about sort of, you know, jumping into the markets. And then as we move back into this nervousness and fear period, you start to see people getting really upset about what's happening in the markets.
(05:16):
And they think it's time to sell this thing. Won't stop going lower. I can't afford to lose any more money in the markets I need to get out. And then it's right at that point of the lowest that, that lowest part of the graph where you see fear is there's a term in the market's called capitulation. And it's where people finally get to the breaking point where they sell out. And that's usually where you find a bottom in the market. And it's usually where people make the greatest mistakes when it comes to their investing, because they didn't stick with their initial investment plan. They let a motion guide, their decision making, and they sold out of the market at the bottom. And they, and, and even if you get back into the market,
(05:56):
Many of the times, most of the times when the market starts to, to come back, it's, it's fierce, it's violent. It happens quickly. And you, you stand, you could be in a position where you, you missed the best move of the market as it's coming off of the bottom, because you didn't stay invested. So even though you say, Hey, I'm gonna get back into the markets when it's going better, you've missed some of the biggest substantial gains potentially a as the market came back. So you really have to watch your emotions, make sure that you have a plan to begin with. That's the first part, and then make sure that you're sticking with the plan as you go along. So on this next slide it's another way of just illustrating this and it's, and, and it goes along with the idea of emotions and also the idea that you're gonna try to pick the top and the bottom of the market, that you're gonna wait a little bit longer until the market bottoms out, and then I'm gonna get in and, and do it.
(06:47):
And, and it, and it's a great sort of metaphor that goes with this in driving in traffic and trying to pick the right lane in traffic. That's moving faster and we've all done this, right? You, the right Lane's moving pretty good. I'm gonna jump into that. All of a sudden it stops. And now I'm there. And I'm frustrated that I didn't stay in the lane that I was in, in the first place. That is the same analogy that works for investing, trying to time the market is, is a very difficult almost impossible thing to do, even for some of the top investors in the world. What we wanna do is make sure that we're invested. We have a strategy we stay invested, and, you know if you're in a situation where you're still accumulating funds towards your retirement or savings goals, this is a great time to be what's called dollar cost averaging, you know, buying stocks or, or, or funds as the market moves in an incremental manner that keeps you invested in the market and adds to your position over time. So just, this is just a useful way of looking at this. Don't try to, don't try to time which lane in the traffic you should be in, stay, where you stay in your lane, keep moving forward, feel good about the fact that you have a plan in place.
(08:04):
So another chart that I thought you might find useful, this is really about having discipline in the markets and, and where that can get you. And if you just took this, this is assuming that you had a dollar invested in, in the, in the markets, the S C I world index. So you, you know, international investment, us and abroad. And if you had a dollar invested in the market in 1970, and you stayed invested when you got to December of 20, 21, you'd have $98, right? So 98 times that, that dollar but it just shows all of the different things that we went through, not even all of them, but quite a few of the big things and shocks that we went through in our, in our economy. So you know, the Iraq war the Russian financial crisis, Asian financial crisis, that was a, that had global implications hurricanes, Katrina and Rita.
(09:01):
It shows through 2008, the.com crash in 2000 subprime crisis in 2008. And you can see on this chart, there are times where these markets really came off quite a bit, but on the whole, as it trends over time, the markets have, have continued to move higher. And that is the advantage of staying invested and disciplined in the market. So this is just a, a way of sort of visualizing the fact that even though we're in a tough situation right now, if you stay true to the original plan that you have, it's likely based on what we've seen in the past, that we may see pay off in, in dividends in the future.
(09:45):
So just to sort of finish up on this, the idea is not let the emotions of the day. The news is always going to hype the worst things that are going on in the markets. They, they really wanna get people aroused with this. And my suggestion is focus on what you can control, make sure that you have an investment plan in, in place. And if you don't have one in place, now, this is the time to be considering how you're going to set yourself up in the future, because we are gonna see downturns in the future. And so if, if this is something that was a real shock to you, or you feel emotionally like you're sort of heart is in your throat, when you look at your 401k balances or your retirement balances, this is a time to take a step back and say, Hey, I don't want to go through this again.
(10:27):
What am I going to do to make this better? Make sure you have a, a portfolio that's structured with diversification that has a little bit of everything in the market, so that you're not necessarily dependent on one piece of the market that could could go lower than other parts of the market that might sustain in certain bear market scenarios. I suggest diversifying globally having a piece in not only the us, but all over the world, we live in a global economy. And, and I think having a piece of that whole economy is, is advisable. Although that might not work for your situation. Like I said, you always talk it over with your your financial person and then manage your expenses within your portfolio how much you're turning over stocks, commissions that you might be paying.
(11:15):
And most importantly, mitigating taxes where you can I'm, I'm, I'm a huge favor in paying our fair share of taxes. I am not in favor of, of giving a tip to the IRS. So a large part of what we do is tax plan and trying to make sure that we are maximizing the tax advantages that are out there in the, in the IRS code, and then just stay disciplined, you know, make sure that when this is going on, we see these bear markets that you are aligned with your plan. And if there's something that needs to be changed, you can look at it after the shock has happened. But when there is a shock, that's the most important time to stay firm to your plan. So
(11:52):
I just last thing is that we have some free resources if you're interested. The I, I have a great checklist about things that you might wanna consider in a recession or a bear market. And if you go into the description below, there's a link to that as well as our 10 year to retirement Facebook group, where we have free resources to talk about retirement as it leads up to retirement, or if you're just recently retired EV everything from investments to social security, planning to Medicare, and hopefully it's a place that you can get some real value. So I hope this video's been helpful. And if it has please feel free to subscribe to, to the videos that we have coming up and have a great.