“The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.”
The bear has been prowling around in the woods and has now planted itself on our front porch… and the bulls are running scared to the edge of the cliff with the S&P 500 index now down over 20% year to date.
Should you sell? We are asked the question in many ways during downturns which inevitably become indiscriminate and irrational due to fear. The answer is almost always no—with the notable exception being any money you currently have in stocks that you may need to spend during the next few years.
Our goal is to maintain an allocation to bonds which could cover your anticipated portfolio income needs for 6 to 8 years. This strategy leads to a better question than “When will the market bottom?” or “Should we just move to cash and wait for things to get better?” The problem with the former is it’s impossible to accurately predict the bottom of the market. And the challenge with the latter is the market tends to move just as fast on the upside as it does on the downside, and just as important, it almost always recovers before the economy does.
With 6 to 8 years worth of income in bonds, the better question is… “Will the prices of investments I am tempted to sell today be higher in 6 to 8 years?”
Although the past doesn’t guarantee the future, history overwhelmingly says that dramatic allocation moves motivated by the short-term fear of loss will be punished severely by a recovery in corporate earnings and ultimately much higher stock prices.
Below, we have slides that look at previous bear markets and deep corrections and what has happened over the next few years to stock prices.
As a coach, I did not stress or talk at all about winning the next game or tournament…but instead focused on a repeatable training process aimed at mastering the fundamentals over an extended period. It is the same with the investment process we have built at Golden Pond:
- Insist on quality
- Keep the focus on the long term.
Then, systematically review both investments and our allocation to them to ensure they reflect our views on what is likely ahead in the stock and bond markets for the next few years.
We have already tilted your allocation to favor investments which have historically done better during periods of higher interest rates and inflation and believe that when fear loses its grip on the market, it will pay long term dividends. But, until fear releases that grip those shifts are not likely to show up in higher values on your statements.
We understand how unnerving it can be to see your values go down day after day but encourage you to see your portfolio as a financial house you and your family need to live in for decades.
Thank you for your continued patience with and support of our efforts to grow and protect your family or institution’s wealth in the decades ahead. Please don’t hesitate to reach out to Katie, Bert or me if you would like to discuss further.
Brian Bernatchez, CFP®
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing includes risks, including fluctuating prices and loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.