Financial markets go up. But they also go down, as we have been painfully reminded in 2022.
Given what’s already occurred, I wanted to offer two recommendations. I suspect the following recommendations may seem at odds with one another, but they shouldn’t. I want to make the case for why that is.
So, here are my two recommendations: (1) Brace yourself for potentially more losses over the next few months, and (2) Even if losses stack up higher from here you likely don’t need to change your portfolio.
Let’s dissect each recommendation.
It probably goes without saying, but I’ll state it upfront and clearly: I have absolutely no clue what is going to happen in the market over the next year. It’s unpredictable. Plenty of people boldly proclaim to have the answers. They don’t. They’re just guessing with supreme overconfidence. Plain and simple, no one knows for sure.
Back in late November 2021, I wrote an article titled, “Get Ready for Losses.” The warning was about a month early from hitting the stock market peak. It was also pure luck that the timing was even close to correct.
In that article, I made the case that the stock market had been on an impressive winning streak and that it had to end sometime. So I suggested multiplying your account balance at the time by 90% or 80% to anticipate what your account would look like if your investments racked up losses of 10-20%.
Well, it happened. In fact, the U.S. stock market has lost a little more than 20% at this point.
You should brace yourself for more.
Again, that’s not a prediction. As investors, however, we must recognize that markets periodically have bouts of insanity. Markets don’t have to be rooted in reality or on fundamentals. Sometimes fear simply takes over, and that could happen this time. It’s possible stocks could fall another 25-35% from here. I hope they don’t – and I don’t think they will – but you should be prepared in case they do.
Which brings us to the second recommendation. Even if the market declines further from here, you probably shouldn’t alter your portfolio. Why? Because market insanity never lasts forever.
Admittedly, that doesn’t make enduring those timeframes any easier as an investor. But expecting the worst, while hoping for the best, is a useful frame of mind for investors.
Now, some of you may be saying, “That’s fine advice for young investors, but I’m about to retire,” or, “I’m in retirement and need this money to live on – what about me?”
Great question. I offer the same answer. You probably don’t need to change anything.
That advice is predicated on one very big assumption, which is that you have ample funds set aside in reasonably conservative investments that will cover your spending needs over the next three to five years. Investment grade bonds or Treasury bonds, despite their losses this year, are fine examples of reasonably conservative investments. So are CDs or a savings account, or even cash in a checking account.
The key thing to understand is that market fluctuations only hurt you if you must sell investments at significant losses to fund your current or upcoming spending needs. Aside from that, losses truly don’t have to mean anything to investors – even when you’re in retirement. Keep in mind, you aren’t looking to spend your entire retirement savings in year one of retirement, or year two, three, or four. That gives your portfolio time to recover.
As long as you have a solid foundation of reasonably conservative investments that are available to cover your expected expenses over the next few years, the fact that the market is having a temporary temper tantrum doesn’t impact your portfolio in any meaningful way.
Remember, good investing doesn’t entail avoiding losses, even painful ones like today. Good investing necessitates expecting the worst and having a plan to stay invested if the worst transpires.
It may get worse before it gets better. But it always gets better. This time will be no different.