Sigh. Evaluate. Do? A guide to investing in a down market
Bleah. Yuck. Scary. Hmmmmm…. Opportunity? Maybe.
The stock market moved into bear market territory (down 20%+) on June 13, 2022. This current downturn is the 17th such market downturn since 1926. If you are looking at your investment portfolio, it might look like a row of raspberries in late August that never got picked. Red flesh that once was healthy and vital now hangs withered and tired under the late summer heat. It is disappointing and discouraging. Looking at your investment portfolio right now may elicit a similarly bleak reaction. This blog post is an acknowledgment of the pain, some context to help evaluate, and a framework for what might be done broken down into four steps.
Step 1. Look at your portfolio? Do you even want to?
Viewing losses in your portfolio, even if you know those portfolio dollars are not needed for many years, can be a painful experience. The mental/emotional pain can infect your overall happiness. If so, it is probably best not to look. Ignorance may be bliss! If this is you, read no further.
Step 2. Sigh
I often read or hear investment advice to “be rationale,” or to “remove one’s emotions from investment decisions.” That sounds good and fine but completely ignores the fact that we are emotional creatures! Most people are able to remove emotions from their decision-making in exactly the same way they are able to remove their tongue from the eating process. Ain’t. Gonna. Happen.
Instead, I think it is important to acknowledge the emotions. Invite them in, have some tea. Notice. Be aware.
Step 3. Evaluate
When do you need the money? If the money you are looking at is needed for something important in the next 5 years – buying a home, paying for college, a big family event, etc, then it probably should not be in the stock market. On the other hand, if the money you are looking at will not be needed for 5+ years, then consider what and how markets have performed historically. Pay attention to the “recovery time” of bear markets.
The following interactive chart is an illustration of the performance of the US stock market, AND recessions that have occurred over the last 95 or so years. The purpose of overlaying the two is that recessions describe the overall economy (jobs, inflation, Gross Domestic Product, etc.) while the stock market is… the stock market. The two are inter-related in complex and messy ways. It is interesting to view them together. If you click on the image below, it will open up a separate tab with an interactive graph.
Graph is courtesy of Dimensional Fund Advisors. Past performance is no guarantee of future results. See end note (1) for details.
I appreciate charts like this. I look at them often, because I like to be reminded of the long-term performance of the markets. In this case, the chart is using green to represent recessions. By hovering over a green bar, you can see some economic data from the recession – it’s name, and an evocative image from the era. By clicking on the particular green bar, you can bring up data about the recession and the stock market during that time. While every bear market and recession is different, history can offer us a guide to what we might expect. Here is a screen shot showing the “Oil Crisis” recession/bear market” from the 1970s when inflation was high, and geo-politics were buzzing in a bad way:
Graph courtesy of Dimensional Fund Advisors. Past performance is no guarantee of future results. See end note (1) for details.
Ouch, the Oil Crisis bear market/recession was painful. That market drop was over twice what we’ve experienced so far in this 2022 bear market, and lasted nearly two years (4 times longer than the current bear market). And yet, in just over 3 years after the market started to slide (beginning of 1973), stocks had recovered their value. And then the late 70s turned out to be an excellent period of stock market returns.
Step 4. Do?
For most people, where investment portfolios are for the long-term, the right course of action is to do nothing but sigh. Maybe stick your head into the sand. Maybe you can think about those wilted little raspberries in your portfolio as what they are to the plant – seeds for growth (see end note (2) for thoughts on when/how the analogy between raspberry harvests and investmenting breaks down).
If you have a strong stomach, putting money into the markets during a downturn can be a good long-term strategy. However, it is difficult, and painful, to invest money and see the value of your investment drop almost immediately. Maybe the pain is hot enough to stop you from doing it again. However, market volatility is the price of admission to play in the investment markets. See step 2 – sigh. Before putting any new resources to work, be sure that your near-term needs are attended to – you have an emergency fund, no short-term high-interest debt, and your near-term goals are on track. If you feel a need to act, talking to a person you trust and who has your best interests in mind is often a good strategy.
Many people are already making investments into this down market without thinking about it through regular paycheck contributions into a retirement plan. The great thing about scheduled contributions is that you get out of the game of looking at the worry-mirror to ask, “is now the right time to invest?” Scheduled actions, in coordination with a bigger plan, can help you avoid the pitfalls of trying to time the markets. As the saying goes, strong long-term investment performance is generally correlated with time in the markets, not timing the markets.
We believe that a good investment plan is one that fits into a bigger picture. Investments, and investment portfolios are assets, things. Investments are not verbs. Hopefully, investments do not drive our lives. Investments should support life. What does good living look like for you? Who are the people you want to support? What are the places you want to connect with? That is the big picture. Connecting your investment portfolio to your big plan is the art and science of financial planning.
End Notes
(1) You can view the full article produced by Dimensional Fund Advisors, along with descriptions of sources of data and methods of analysis by clicking here: Market Returns through a Century of Recessions
(2) The breakdown of the analogy between the Biology of raspberries and investment markets. As I apply the analogy of raspberries to investment markets, it might lead one to think there is a seasonality to the investment markets, and there might be a right time to “harvest the gains” in our portfolios. Unfortunately, there is no evidence that such a strategy works. In fact, most studies suggest that trying to sell to avoid the losses, then buying back in through good market timing is a losing strategy over the long term. In the case of raspberries, the opposite is true. Nature has developed a mechanism by which there most definitely IS an optimum time to harvest – the sweet fruit is delicious, attracting birds and other critters to eat, who in turn transport the seeds to new locations, then dump them on the ground in a nice little padding of fertilizer so “sow the fields” for future raspberry plants. And thereby spreading the seed, increasing the population of raspberries, and leading to species-level success.
