My ten-year son often asks me, “Mom, who’s your favorite child?” I tell him, “I love all my children equally,” but that never seems to satisfy him. So, then I answer, “You’re my favorite son” (note: he’s my only son) or “Of all the 10-year-old boys in the world, you’re my favorite”. He nods his head approvingly. He has an uncanny knack at asking this question when he knows I’m disappointed or challenged by one of his siblings. As anyone who is in a relationship can attest to, we can both enjoy and be challenged by that person at different times of the year, month, week or sometimes even the same day.
Over my two decades as a financial advisor, I have had the pleasure of working with many different types of people. Like a parent who loves their children equally, I have genuinely cared for the clients I have served even when times have been more challenging.
I once served a client who I’ll call “Phil”. Phil liked to check the market multiple times a day. When the market was advancing, he experienced strong FOMO (fear of missing out) and he’d want to add more to stocks. This was often at the time I was concerned stocks were approaching “overvalued” which put the risk of potential loss at the highest point. When the market declined, he would want to sell stocks so he could preserve what he had left. This was often when prices were approaching “undervalued” and had a better chance of regaining than losing more. I spent a lot of time talking with Phil about investment principles such as the time to add to stocks is when they’re low-priced, and to trim from stocks when they’re high-priced. Phil knew this intellectually, but his emotions would take over and he desired to do the opposite. Maybe you can relate to Phil. These emotions are strong for many. As Warren Buffet once said,
Success in investing doesn’t correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble investing.
We have entered a time that feels uncomfortable and “impulses to act” may appear. The stock market hit correction territory this past week, which is defined as a decline of 10% from the peak1. Corrections can be a first step toward a bear market (a decline of 20%). They can also be short-lived and reverse course quickly as they did after March 2020. We won’t know until it happens.
You’re probably noticing the headline news feels more negative. The Israel-Hamas war has sparked fears around the world and many feel a range of emotions over the loss of life and concern over resources. In the backdrop, the Ukraine-Russia war continues. People worry about what might happen next.
Economic and unemployment news in the U.S. is generally positive, which in this “good news is bad news” era bodes poorly for the market. Bonds are experiencing a historic bond market rally which may sound positive, but this causes prices in bonds to drop as yields advance. For the first time since 20072, the 10-year treasury yield reached 5%. As a comparison, in October 2020 during the pandemic the 10-year treasury was 0.79%. Keep in mind that while bonds prices can fluctuate, the income is constant. With bonds, you know how much you’re going to make and when you’re going to get paid, barring a bond default.
Higher yields are leading to tighter financial conditions. Even though the Fed held rates steady in September, the recent increase in 10-year treasury yields is the equivalent of 3 Fed rate hikes of 0.25%!
Many believe the fourth quarter we’ll see economic slowdown, in part due to tighter financial conditions. Another factor is the fact that on October 1st, payments on student loans restarted. According to the Economist, “given that there are about 43m borrowers, this will drag on the American economy.”3
It probably comes as no surprise that the market sentiment is negative. The CNN Business Fear & Greed Index is used to gauge the mood of the market. When combined with fundamentals and other analytical tools, the Index can be a helpful way to assess market sentiment. The index shows that investors are currently in “fear” territory4.
What does this mean for investors?
Investing is a roller-coaster ride with exhilarating highs and nerve-wracking lows. While it's easy to stay invested when markets are booming, the real test comes during down markets. The temptation to sell and cut losses can be strong. Yet, history has shown that staying invested during down markets is often the wisest strategy. Below are five practical strategies to help you stay the course.
- Time in the Market vs. Timing the Market:
The concept of "time in the market, not timing the market" is an essential mantra for successful investors. Trying to predict when to buy and sell is notoriously difficult. Instead, focus on the long-term. Historically, those who remained invested through market downturns have seen their investments recover and, in most cases, grow substantially over time.
Capital Group analyzed S&P 500 Index data over the past 94 years through December 31, 2022 and found that 94% of 10-year periods have been positive5.
- Dollar-Cost Averaging:
One effective strategy for staying invested during down markets is dollar-cost averaging (DCA). DCA involves consistently investing a fixed amount of money at regular intervals, regardless of market conditions. When prices are low, your fixed investment buys more shares, and when prices are high, it buys fewer shares. DCA can reduce the impact of market volatility on your portfolio.
- Maintain Adequate Cash Reserves
Having cash on hand can provide you with liquidity in case you need to cover unexpected expenses or take advantage of investment opportunities that arise during the turmoil. For those regularly taking withdrawals from the portfolio, having a cash cushion within the portfolio is a good idea to draw from during periods of volatility.
- The Power of Compound Interest
Albert Einstein once referred to compound interest as the "eighth wonder of the world." Staying invested during down markets allows you to benefit from the compounding effect of receiving income from your portfolio over time. As you reinvest dividends and income, you are purchasing shares at a discount when the market is down. Reinvesting can significantly boost your returns over time.
- Buying Opportunities
Market downturns present buying opportunities. Perhaps counter-intuitive to our emotions, when fear is highest and the news is often the worst you’ll find the greatest opportunity to purchase investments at bargain prices. If you don’t have cash to invest, even the act of rebalancing will allow you to sell from an investment that has done well and purchase an investment that has declined.
What should investors do next?
If you’re taking advantage of the five strategies, the next best idea may be to stop watching your portfolio balance and instead focus on what you can control. One thing you can control is attaining short-term goals you have set for yourself.
- Take a few minutes to reflect on some of your life goals that you have already achieved. Write them down.
- Now, think about what you would still like to achieve. Write these down on the same piece of paper.
- Tape this paper somewhere where you’ll see it often.
- Pick something from your “would still like to achieve” list and come up with a plan to accomplish this goal. Don’t hesitate to reach out so we can strategize together on how best to meet your short-term goals.
Staying invested during down markets can be a challenging but ultimately rewarding approach for long-term investors. By understanding the cyclical nature of markets, adhering to a disciplined investment strategy, and focusing on the long-term, you can harness the potential for growth and financial stability. Remember that investing is a journey, not a sprint. Stay patient, stay diversified, and stay invested, and you'll be on your way to achieving your financial goals.
Anne M. Ward, CFP®, MPAS©, AIF®, CRPC™
Founder & Principal Wealth Manager
1Schulz, Bailey. (2023, October 29. Updated October 30.) Stock market rises after S&P 500's drop into a correction. What's next for your 401(k). https://www.usatoday.com/story/money/2023/10/29/stock-market-correction-territory-meaning/71349135007/
2Knueven, Liz. (2023, October 27). 10-year Treasurys hit a 16-year high — here’s how you can take advantage. https://www.cnbc.com/select/10-year-treasury-notes-hit-a-historic-high/#:~:text=For%20the%20first%20time%20since,near%20its%2016%2Dyear%20high.
3The Economist. (2023, September 14). The resumption of student-loan payments will hit American growth. https://www.economist.com/finance-and-economics/2023/09/14/the-resumption-of-student-loan-payments-will-hit-american-growth
4CNN Business. Fear & Greed Index. https://www.cnn.com/markets/fear-and-greed
5Capital Group, American Funds. Time, not timing, is what matters. https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html
The views expressed within this newsletter are subject to change at any time without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security or strategy. This commentary is provided for informational and educational purposes only. Information obtained from third party resources are believed to be reliable but not guaranteed. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results.