Do you remember when your financial advisor asked you what you would do if the stock market was down 10%? 20%? Together you explored your tolerance for risk. In that theoretical conversation, you didn’t have the advantage of knowing the details of why stocks had fallen.
If this conversation happened during the last 10 years, it was in the context of a seemingly unstoppable stock market rally that began in 2009 as the world was emerging from the global financial crisis. It might have been easy to say that a 20% decline wouldn’t bother you, perhaps because the markets had been benign for so long or because in your mind’s eye, such a sell-off would be short-lived.
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Riding Out Down Markets
Fast forward to the current reality. Year to date through June 16, the S&P 500 Index was down 22.5% and, to make matters worse, the Bloomberg U.S. Aggregate Bond Index was down 11.5%. The circumstances of these selloffs are well documented. Inflation topped 8% for the first time since the early 1980s, meaning that anyone under age 60 today would not have experienced similar inflation in their adult lives. The Federal Reserve is aggressively fighting inflation by raising short term interest rates with the aim of slowing the economy, but not too much. There is a grinding ground war in Europe for the first time in several decades that is causing not only devastation and death, but a certain global food crisis and runaway energy prices.
And so, investors who said they would ride out a 20% decline might be thinking this situation is different than what they had in mind. The problem is, each crisis has its own unique causes and contours that can’t be anticipated.
Over long periods of time, however, investors who stay in the markets typically do well. From 1980 through 2021, S&P 500 Index was up 12.3% on an average annual rate (with dividends reinvested) but it was anything but a smooth ride. An investor had to stay invested to have achieved that return.
During those 42 years, the index fell 30% or more intra year five times. It fell 20% or more seven times and 15% or more 15 times. And still, the index was positive in 35 of those 42 years. It would have been very tempting to succumb to fear any number of times, but to do so would have been detrimental to an investor’s long-term return.
Consider Talking To Your Financial Advisor
So where does that leave investors today? No one knows when the equity markets will settle down or what might soothe investors’ collective anxiety. We don’t know if the Federal Reserve will be able to tame inflation without causing a recession and we don’t know how long inflation will erode the purchasing power of income. But if history is a guide, taking your time and not making rash decisions in the face of fear is usually a wise choice.
Markets have always been risky, so the recent experience should come as no surprise. Your reaction and your feelings in the face of the current circumstances may have surprised you. If they did, contact a financial advisor to talk through what might have changed in your situation to require an adjustment. If you said you would sit tight in the face of a bear market, you have your answer.
Article By Chad Horning, CFA® – President, Praxis Mutual Funds®
About the Author
Chad Horning, CFA®, is president of Praxis Mutual Funds®, a fund family of Everence. Praxis pursues real-world impact through a suite of optimized equity index funds and an actively managed Impact Bond Fund. Learn more at praxismutualfunds.com.
Image and article originally from www.valuewalk.com. Read the original article here.