Ok, there are no lions and tigers, but there are bears – a bear market, that is! The US Securities and Exchange Commission defines a bear market as a “time when stock prices are declining and market sentiment is pessimistic. Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period.”
We are officially in bear market territory. As of July 18, 2022, the S&P 500 Index has fallen by 19.62% and the NASDAQ Composite Index has fallen by 27.39% since the beginning of 2022.
In contrast, the S&P 500 Index returned 26.61% in 2021 and 18.4% in 2020. Investors, including me, enjoyed seeing portfolios grow over these time periods. Now, a significant portion of that growth has been erased in 2022. And market volatility has increased. As investors, negative returns and stock market volatility, and the uncertainty that these things cause, can lead to financial stress.
Recently, I have seen several ads in the marketplace, suggesting that now is a good time to talk to your financial advisor. Not because your financial advisor has any way to change the direction of the stock market. But rather, to talk about the uncertainty and financial stress, and the benefit of sticking with your financial plan, in good times and in bad.
I have experienced four bear markets in my investing history. The first was the dotcom crash that occurred between 2000-2002, where the S&P 500 tumbled by 36.8% over the course of 1.5 years. The second was between 2007-2009, when the economy went into a recession and entered into the second worst bear market since 1929. The third was in March 2020 when the Dow Jones Industrial Average (DJIA) entered a bear market for the first time in 11 years due to the pandemic.1 And the fourth time is now.
All four times, I did the same thing – nothing. I did not panic sell (not a good idea). I also did not invest further in the stock market. Bear markets can be seen as a time when the stock market is “on sale,” and some advise that it is a good time to buy when prices are low. However, it is difficult to know with certainty when the market has hit the low point prior to recovery (which would be the best time to buy). It is possible that one could invest their surplus cash in a declining market, and the market could decline further, prior to the recovery.
As I have mentioned in a previous post (How to Choose a Financial Advisor), I have my investments in a self-directed investment account. My funds are invested in index mutual funds and exchange-traded funds (ETFs). My total investable assets are allocated between bonds and Canadian, US, and international equities, for the most part. It is a passive investment strategy. Each category of fund has a target asset allocation. When I set up my investments, and added to them, I allocated the contributions to the specific type of fund based on the target allocation. And then I sat back and watched my investments grow. Set it and forget it. Twice a year, I review the asset allocation to make sure that it is close to the target allocation. When it is not, I buy/sell funds as appropriate to return to the correct allocation.
So, while the current bear market is concerning, for the most part, I am not concerned. Overall, the S&P 500 Index has returned a historic annualized average return of approximately 10.5% since its 1957 inception through 2021.2 However, not all investors will earn this average return. If you buy when the market is at its peak, or sell when it is at the bottom of the valley, you will not achieve this historic annualized average rate of return.
It is not timing the market that is important, but rather time IN the market. The medical students that I work with often express interest in investing in the stock market, often because their friends or classmates have achieved some stock market successes (some food for thought, do you think that the friends/classmates that have realized stock market failures also talk about those? I’m sure not as much, if at all). My rule of thumb is that unless you have funds to invest for the long-term (at least 5-10 years), these funds should NOT be invested in the stock market. If you invested your savings in the stock market at the start of 2022, and then needed the funds to pay for your fall tuition in September, you would have to sell your investments at a loss (assuming that the market does not recover between now and September). And depending on how much you had to invest, it is possible that you might not have enough money to pay your tuition in full.
For short-term savings, I recommend a guaranteed investment certificate (GIC). There is nothing exciting about GICs, but your principal is 100% guaranteed, making them the perfect investment vehicle for surplus cash that will be needed in the near term. GIC rates have been rock-bottom in recent years, due to the low interest-rate environment that we have been experiencing. However, as I discussed in a previous post (How Do You Like Them Apples?), the Bank of Canada started increasing its benchmark interest rate on March 2, 2022. The most recent increase happened on July 13, 2022, when the Bank of Canada increased the overnight lending rate by 1%. While this is bad news for borrowers (as the cost of borrowing increases with these interest rate increases), it is good news for investors (as the rate on GICs also increases with these interest rate increases (although not at the same rate as the cost of borrowing does)). A local Winnipeg Credit Union is currently offering 2.4% on their high interest savings account, and 3.65% on a one year GIC. While these rates are far lower than the S&Ps’ historic annualized average return of approximately 10.5%, your principal and the rate of return is 100% guaranteed. You cannot say the same about the stock market.
1 Source https://www.investopedia.com/a-history-of-bear-markets-4582652
2 Source https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
I am not a professional investment advisor and the information in this post should not in any way be construed as a replacement for personalized professional advice.
Life Lessons 