The global markets have been in a steady decline for the past month or so. Leading up to December, we saw a spike in volatility, and now we are nearing Bear Market territory.
What gives? Well, for one thing, there's no shortage of scary headlines: tariffs and fears of a trade war, Fed rate hikes, a government shutdown, and a foreign policy clash in the White House. Mr. Market is made up of billions of participants. Those participants are people. And those people are worried. Mr. Market is emotional, and he doesn't respond well to short-term uncertainty.
So is Mr. Market being a Scrooge, or is he offering an enticing Christmas discount? It all depends on how you look at it, but here are a few facts that should help keep things in perspective:
- Market declines greater than 10% happen on average once every year
- Daily declines of 2% happen on average 5x per year
- Markets are positive nearly 3 out of every 4 years
We know that these market declines are a part of investing – markets don't provide positive returns for free, and we can't share in the upside unless we endure the downside. Market volatility and temporary declines are the prices you pay.
But what does this mean for you? Below are answers to some FAQ's:
I'm retired. Do we have to sell stocks at low prices to fund our withdrawals? No. We hold short-term high-quality bonds for a reason: they usually don't decline when stocks decline. Each retiree can take roughly 8-10 years worth of withdrawals in bonds before they'd need to sell stocks at depressed prices. We can't predict when market declines will occur, so we prepare for them ahead of time. Bonds provide a long runway to help retirees endure a bear market.
Should we make changes to the portfolio? Has your financial plan changed? If not, then it's best to leave the portfolio as-is. As a general rule, portfolios should only change in response to changes to your life situation, not in response to market movements. In a bear market, the best thing to do is to continue following the disciplined rebalancing strategy set into place: always buying at relative low prices and selling at relative high prices.
I'm still working and saving, how should I respond? You should respond with joy and Christmas cheer! This decline is the best Christmas sale around; in fact, it's the only sale that will make you money. You have the opportunity to buy stocks at cheaper prices, and when the market inevitably rebounds, those stocks will grow for the rest of your life. Ironically, stock market declines are the only sales that people run away from – when you're a long-term investor, you should welcome these declines with the same enthusiasm you have for Black Friday!
Mr. Market can be emotional and unpredictable. We can't control him, but there are many things within our control: how much we save, diversification, tax efficiency, asset allocation, and disciplined rebalancing.
If you are a QHA client, rest assured that you've done all you can do to prepare. Now is the time to turn off the TV, put down the newspaper, and enjoy the holidays with your family and friends. But if you'd still like to talk through it further, I'm here for you.
Merry Christmas and Happy New Year!