Preparing for the next downturn
I hate to be the one to break this to you, but if history is any guide, we are heading for another market correction. Oh, and another bear market, too.
You will notice that I didn’t predict when any of these events will occur, because I honestly have no idea. But given what we’ve experienced over the last hundred years or so, it’s probably safe to expect one or both of them to happen again before long.
Since 1950, the S&P 500 index has experienced a correction – a 10% or greater drop in price – every couple of years. Bear markets – when equity prices drop 20% or more – have happened about every seven years on average. But when it comes to predicting short-term events, long-term averages are a very blunt instrument to say the least.
But as long-term investors, we don’t have to make predictions. We don’t require a market outlook, and despite what the financial media scream at us daily, we don’t really need to read the 7 Ways to Prepare for the Next Market Crash.
Why not? Because all we have to do to earn the future return of equities is to: 1) own them through good times and bad; and 2) not try to avoid things we can’t predict but are going to happen anyway.
As legendary investor Peter Lynch once put it: “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
So, in keeping with the eye-catching “7 ways” headline gimmick, let me give you seven good reasons not to waste your time and money trying to avoid the next market downturn:
- Jumping into and out of an investment program interrupts compounding, the magical force that makes money grow over time.
- Corrections and bear markets give you the opportunity to buy more of what you own at discount prices, which makes compounding work even better.
- If you sell stocks that pay dividends, you’ll miss out on that income, and dividends are yet another way to boost the power of compounding.
- Timing the market is a poor investment strategy. If it weren’t, someone would be rich and famous by now for doing it successfully and consistently.
- Buying and selling stocks can be expensive when trading costs and taxes are taken into consideration.
- The value of your stocks will probably fall during the next correction or bear market, but if you don’t need the money, you won’t have to sell at the wrong time. Lesson: don’t buy stocks with the rent money.
- You’ve got better ways to spend your time. Spend those irreplaceable hours with your children or grandchildren. Volunteer at a food pantry. Read a book. Heck, organizing your sock drawer is a more productive use of time than worrying about something you have no control over. You get the idea.
Owning equities has been one of the best ways to build and maintain wealth over the long run. But to earn those returns, investors have to put up with almost constant short-term uncertainty, volatility that can sometimes be scary, and the aforementioned downturns and setbacks that the financial media would have us believe are avoidable.
If you’re going to own stocks, occasional setbacks can’t be avoided. Bad financial advice can be.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mike Brown Financial Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.