Listen in to Certified Financial Planners, Gabe Lapito and Ryan Gomendi of Strategic Retirement Plans, as they give their best advice and suggestions for navigating this economic shift and the downturn of the stock market.
Staying the Course
Ryan and Gabe wanted to take some time out of their day to present, “Staying the Course” during these down markets. Markets like these require patience, discipline, and the ability to control one’s emotions. Gabe went to school in Ohama and got to hear from Warren Buffet on several occasions. One of Buffet’s key ideas is that “it’s not about timing the market, it’s about time in the market”. Part of this course with many clients is developing a plan for economic recessions, bear markets, and these sorts of times.
We know it has been a challenging investment season for the last 44 months, specifically for the last 6-8 months. This is why this presentation is so important today. Risk consideration is a factor in the plans SRP makes, this presentation is the opinion of the advisors from SRP.
History of Recessions and Bear Markets
- 1929-1941 Great Depression
- 1941-1945 World War II Market
- 1970s-1980s Run-away Inflation
- 1973 Oil Embargo
- 1980s 20% Federal Interest Rate
- 1987 Black Monday
- 1990-1991 Recession
- 2000-2001 Dot-com Bubble
- 2007-2009 Great Recession
- 2010 Flash Crash
- 2015-2016 Interest Rate Crash
- 2018 China Trade Wars
- 2020 Covid Pandemic
- 2022 Inflation Scare
- ??? The Next Event
Looking at the last twenty-two years of this list, we see many periods where the market has been in recession and/or the market has been down. There is always going to be the next scare, there will be another event. We show all these major events in U.S. history to prove that the market bounces back. “This time” always feels different, but we have seen many different types of events that have brought down the market, but it eventually recovers.
Over the last 42 years, the S&P 500 has an average of -14% intra-year decline. Despite that percentage, the annual return of the S&P 500 has been positive 32 out of the last 42 years. Another great indicator of throughout volatility, the market trending positive through it all.
Timing the Market is Impossible
Some may wonder, “why can’t I time the market, get in and get out”. Timing markets takes being able to know major historic events before they happen, as well as how the market will respond to them. Then you have to know when it will bounce back. You essentially have to be able to see the future. You could easily miss out on major gains in your portfolio by playing the “timing” game. It’s important to “zoom out” to see the broader picture of market inclines over many years. It can be easy to be too narrow in view and only see red declines the last 3-6 months. Timing the market isn’t a strong strategy.
Study of the World’s Top Investors Attempting to Time the Market
A Davis New-York study was done on 3-4 generations of NY investors, following the top economists across the entire world to see if a 10-year treasury will go up, or down. All they had to do was guess whether the 10-year treasury would be up or down. They found that 60% of the economists failed and could not predict the market trajectory over a decade. The smartest brains in economy could not figure this out, yet alone try to forecast what stocks, bonds, and everything else will do.
Can you name one famous market-predictor? Probably not because there isn’t one. Nobody can see the future. If there were a famous predictor, you would know their name because they would be one of the richest people on the planet by timing the market perfectly every time. Warren Buffet said, “If there were a person who timed the Great Recession perfectly, I would not hire them for my team. The reason being, they would believe they could do it again.”
The other factor is not only do you have to know when to get out of the market, but also when to get back in. Usually when the market rises back up, the market looks very scary economically, you have to have the guts to jump back in and guess correctly to catch the few days of major growth on the upbound.
Investing is Not Natural. Have a Plan
If market predicting is impossible, then we want to be investors that think long-term. However, there are some reasons why investing isn’t natural. First, from a behavioral standpoint, the pain of losing money is somewhere between 2-3x as bad as the joy of gaining money. Similar to someone degrading you with a negative comment vs someone giving a positive comment. The impact of the negative outweighs the positive.
Media is made to Sell
We have a fight or flight mentality where we tend to follow the crowd and let emotions control our actions. Media in our world exists to create big headlines and sell news, not to make you a better investor. Roughly 80% of news and media over the last decade is negative, because it sells.
Short-term vs Long-term Markets
Short-term markets act like a popularity contest, long-term they are a weighing machine, taking in fundamentals and growth over time. Good stocks are down right now because the overall general market theme is negative. There are companies who have not had stocks decline right now that may not be substantial. It’s easy to get caught in our own investor biases; hating the red lines that are on the chart, even when it’s a small portion of their portfolio. Recency biases, Hindsight bias, and Mental bias all trigger emotions that may be irrational.
Stocks are liquid, they will be Volatile
Stocks are the most liquid asset in the world. They are going to be volatile. We can buy and sell an individual stock within minutes, not that we should, but it’s possible. If you check your accounts everyday online, you may go crazy. Volatility exists because of the high liquidity in the markets.
The Common Investor Experience
The common investor can easily get caught in a cycle with the volatility.
- (at a market low) “I’m not going back after what just happened.”
- (as the market is climbing) “I don’t trust the market.”
- (as the market is rapidly increasing) “I should have bought earlier!”
- (as the market nears climax) “All in!”
- (as the market starts declining) “I think the market is taking a breather before increasing again.”
- (as the market declines further) “This is normal stocks always go up in the long run.”
- (as the market nears its new low) “I better ride this out it’s too late for me to sell.”
- (at the market low) “Sells everything.”
The Solution (where SRP comes in)
The cycle then continues. This is a hard cycle to break, proving our previous point of how hard the market is to time. What’s the solution you may be wondering? First and foremost, have a plan to prepare for these seasons. We help our clients assess risk and get it right. Everyone loves the green days, nobody loves the red. Red is part of the green…markets will go down from one day to the next. The worst time to change your risk is when markets go down. Re-evaluate risk when seasons of life change.
Our Bucket System to Diversify Portfolios
Utilizing diversification and our bucket system, we are always ready with assets that are always going up or at least holding their own so we can get you cash in retirement as you need it. The first “bucket” is usually safe, the second is a bit risky, and the last bucket is usually stocks which are the most volatile.
Sustainable Withdrawal Rates
Long-term, you have to have sustainable withdrawal rates. This is how much money you take off the portfolio on an annual basis. We’ve seen anywhere from 3-5% depending on the market and your stage of life. Withdrawal rates on a portfolio are very important, and we are always having that discussion with clients to make sure we can sustain the rate forever.
Tactical Investment Changes
Our investment team is always looking at tactical investment changes. We make sure to reduce risk in the right places when markets are up. When they are down, we find companies that are on “sale”. We are looking for those victories and little changes in 10-20% in the portfolio where we can really get some things timed well.
Understanding your own Investment Behavior
Be a student of your own investor behavior. Understand where you tend to get emotional and try to coach yourself. For some, it may be not looking at your statement in these seasons. For others, it may be looking at it more to remind themself it’s not as bad as they assume. Remain patient. It’s investing not gambling. It’s all about the long-term trends.
Walking with SRP in Retirement
To wrap everything up and put the key pieces together, let’s summarize.
- We are long-term investors, stay the course
- It’s not about timing the markets, it’s about time in the market
- Not once since 1972 NYSE has it not come back to set a new high, nor the economy
- Our entire US and world economy are built on the equity or stock markets engaging with all the major companies we invest into on a public exchange
- Rarely do our emotions make good investment decisions, almost never. Understand your own biases to maintain wise investment choices.
- We have multi-year drops in the market of 14% on average yet are positive 70% of the time.
- We have a plan for every one of our clients. You hired us to do so, and we want to help you withstand these storms. Losing money is not what we are in the business to do. We dislike it as much as anyone, but we understand volatility and market declines are a part of the game.