Our industry is failing you because too many Advisors ignore history and thus are not loaded and ready for bear. By J Thomas Knight, CFP®, CPA
Bear Market Definition: A bear market is when a majority of stock prices are declining and declining substantially over time.
This vague industry definition does not specify a percent decline that officially marks a certain drop in the market to be a bear market; however, we can assume that anything approaching a 20% decline is generally beyond tolerable and downright alarming. Therefore, most market analysts announce a bear market when the majority of stock prices have fallen approximately 20% or more. The industry term “bear market” is widely used when talking about the stock market, especially the major stock indices such as the Dow Jones Industrial Average, the S&P 500, and the NASDAQ.
Bear Market Historical Chart:
Based on the Bear Market Historical Chart you can see that:
- Since 1929 we have experienced 16 bear markets – that’s nearly 1 every 5 years
- Since 1973 over 60% of those 40+ years have been declining or recovering from a bear market
- The average bear market decline is over 36%
- The average length from Peak to Bottom to Peak again (Recovery) is nearly 5 long years
Did you know these startling statistics? It’s doubtful because most advisors don’t address bear markets.
Why don’t they talk about bear markets? The answer is one of simple math!
Given the magnitude of returns required to recover from declines, most Financial Advisors focus on bull markets rather than avoiding bear markets. As a result, a strategy or philosophy specifically addressing declining markets is overlooked and so is the 800 pound bear in the room.
Six hard truths and questions indicating why the financial industry may have failed you:
- Investment companies (Mutual Fund and ETF companies) want you to “Buy & Hold” your investments. Meaning, they do NOT want you to exit their funds even when it declines. Could a reason for advocating this strategy be to keep you invested while continuing to collect their fees?
- To support their “Buy & Hold” strategy, the industry proclaims that asset allocation, diversification, and rebalancing will reduce risk and dampen volatility. What happens when nearly everything falls as it did from October 2007 through March 2009 (see Bear Market chart)? Did sticking with an asset allocation work? Will history repeat itself? Was #16 the last bear market?
- Does the strategy of Buy & Hold work? Yes, if you have an infinite time horizon, like a Yale Endowment Fund, then you can hold, hope, and wait for a recovery. Do you have unlimited time?
- What is your financial advisor actually doing for you? Providing an asset allocation? Managing the money managers? Did you know that Asset Allocation strategies are free on the internet today?
- A common thought amongst Financial Advisors, regarding cash, is that cash is not an asset class. Why is that? As markets fall, doesn’t it make sense to allocate more to cash?
- The secret to investing: Buy Low, Sell High. Is “Buy Low, Sell High” the same as “Buy & Hold”?
These answers come easy; however, the really tough question is: Do you fully understand and agree with the strategy and philosophy that is being employed in your portfolio?
Our investment strategy DEFEND & Deploy® aligns with your natural instinct to buy low and sell high. Our objective is to defend your gains during bear markets (which can include going to cash) and deploy your assets during bull markets. We actually monitor and manage your portfolio.
Bear Market #16 proved that Asset Allocation and Buy & Hold did not provide safety during that bear market. It took nearly 5½ years for the S&P 500 to go from its peak in October 2007 to its bottom in March 2009 and then rise back to its 2007 peak in March 2013. 5½ years and the S&P 500 gained no ground…that’s right – gained NO ground. Do you really have that kind of time and money to waste?
When, not if, Bear Market #17 roars and makes its presence known, will you be Ready for Bear?
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