“A recession is coming! A recession is coming!” This has been the news media’s cry for the last five or ten years and yet it hasn’t happened.
There’s an old joke that economists have predicted fifteen of the last three recessions. Unfortunately, the horrific crash of 2008 is still fresh in our minds and the very thought of it repeating can send shivers up your spine.
Sometimes investors lose more opportunity by trying to avoid a recession than the damage a recession actually causes.
So let me ask you a question. If you were an investor and you rode out this terrible period, did you not survive? Did you not even prosper?
So here are some facts. During the 2008-2009 crash, the market did drop 50 percent. Diversified investors were down much less than this. Let me guess at about 33 percent. But the stock market has recovered over 300% since then.
Now I’ll admit that numbers can play mental games so let me say it this way. If you had an account with $1 million and you lost half, that would be down to $500,000. That’s dramatic and even upsetting.
But then a 300% increase would put you at $1.5 million. Maybe not remarkable profit over ten years, but it is positive, and it still beats holding cash and CDs.
Now let’s compare that to a couple of families I know. One family is always super conservative, lots of cash, CDs, and maybe even some bonds. They felt really, really smart because they were safe. They even made fun of people experiencing the losses and stress. Since they were so smart, they did not see the need to change. But the market has climbed 300% all while they are earning 0-2% in low yielding investments.
One million dollars in the bank would have possibly brought you up to a $1.2 million over ten years or $300,000 less than the other example. And guess what. Inflation has been running around 2%, plus they had to pay taxes on their earnings. So you can see they are really behind. Now their only choice is to spend less and less and hunker down and let’s just say a tight budget.
Another family was investing but as the losses started to mount, they got scared and they pulled the plug and they lost 30%. Now they feel vindicated, even smart, as losses everywhere else continued to increase.
Why would they invest now? They were right and the world even looks worse. But as the market started to improve, it looked high. In fact every step of the way, it was a multiyear high and eventually an all-time high. So the $1 million went to $700,000 with their loss and that’s pretty much where it stuck.
“A recession is coming, and we don’t want to step back into that bear market trap again!” Stay out, all while giving up 300% returns. It’s about now that I bet you’re thinking, “If I can get out right now before it gets bad, then I will buy in at the bottom and ride it back up.”
But think about the story I just told you. If you were lucky enough to guess when the downturn will start, you will feel really smart and you will even look – even though the world looks more scary, are you going to jump in now? I haven’t met anyone yet that has. And as the market climbs, are you going to jump in when it’s at a one-year, a two-year high? I’m guessing not.
You know, the greatest investor of all time, Warren Buffett says that trying to be smart and time the market is a fool’s game. So here are some facts to help you:
There are about only 11 setbacks since the 1940s of more than 20%. Now they do average 30% each, but bull markets average increases of 258%.
So here’s another story. In a recent setback, one of my clients called with a little bit of stress in his voice. “What’s our plan?” he exclaimed. “When will we make adjustments to save my portfolio?”
Now he already had somewhat of a balance of modestly conservative portfolios, so it wasn’t all in the stock market. I told him he already had a plan. We had set the risk of the portfolio before bad things happen, not during recessions.
To make decisions under stress is a guaranteed way to make a poor decision. As you watch the news and see that the market is down, please realize that not all your money is in the stock market. We have real estate. We have bonds. We have business loans, etc.
So the trick is to make the portfolio conservative enough that you will not freak out and pull the plug during the downturn, but aggressive enough to meet your retirement goals.
That’s why we do a financial plan. A plan considers that there will be bad times from time to time and we’re ready for it. We just have to ride it out.
There’s one thing I’ve learned by investing large amounts of money through four horrific setbacks, and that is we always come out the other side and prosper. Setbacks are temporary.
Now this is not to make fun of fear or to deny that a recession is coming. I know it’s coming in the next year or two, and it gives me a knot in my stomach. But our portfolios are designed a little bit more conservative right now than normal, and we are ready for a recession. We are confident in your long-term ability to be successful.
So if you have questions about actual defensive assets that we’re using and how we build portfolios to help our clients prosper, please give us a call. Thank you.
[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor. Statistics and market information provided by Litman Gregory Advisor Intelligence.]