With the 8-year bull stock market reaching new highs, concerns of a bear market (greater than a 20% decline) are increasing. It is often said that the stock market often climbs “a wall of worry.” Many stock gurus have been predicting a market collapse for the last five years during which the overall market averaged about a 14% per year return. (Morningstar)
The occurrence of another bear market is not a matter of if but when. This fact doesn’t mean that the market may continue to go up for next year or more. Market corrections (a decline of 10% to 20%) occur on average of about once a year and need to be of interest to only short-term traders.
However, bear markets (decline of greater than 20%) are painful to most investors. What do investors need to know about bear markets? Bear markets are usually caused by a recession (Barons 2017). Recessions are usually preceded by a significant rise in interest rates/inflation. Low interest rates and energy prices help stimulate the economy. As we found out in 1929 and 2008, a financial crisis can trigger a profound recession or depression. However, barring a “black swan” event (rare and largely unpredictable), no financial crisis appears on the horizon. If foreign economies (particularly China) slow down significantly, it could spill over to our economy. This risk is currently low since international economic growth has been positive.
I believe that the best strategy for the long-term investor is to have a financial plan to include the necessary resources to wait out a bear market. On average, it takes 3.1 years to recover from a bear market (WSJ, 2016). The market drops for an average of one year and the recovery phase averages 2.1 years. Therefore, your financial plan should allow you to live off your income, dividends, and short-term bonds/cash equivalents for three to five years. This strategy allows you to ride the bull market to its highest extent and not be forced to sell low because you run out of money. Investors and financial advisors usually underperform in the long run by trying to time the market (Bojinov, Dividends.com,2014). According to Zacks Investment Management (2017), over the last 20 years investors have averaged only a 2% annual return versus the market 7.7% return. This is partially because market timing involves two extremely difficult to predict events—when to sell out and when to buy back into the market. In conclusion, enjoy the bull market ride and prepare financially for the next bear market.
This letter represents the opinion of John D Quimjian as of September 14, 2017.
John Quimjian is an investment advisor representative with Physicians Wealth Solutions LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.