As I have mentioned in previous newsletters I tend to worry about a lot of different things. One thing I worry about occurs when I am traveling and I have to catch an early flight home the next day. During this non-event I am guaranteed to sleep less than four hours the night before the flight leaves.
My typical pattern the day before the flight leaves includes calling the hotel’s front desk for a wake-up call. Next, I set a wake up alarm on my cell phone for backup purposes. Finally, I try to go to sleep. Once I finally fall asleep, I find myself waking up several hours before the alarms go off because I am so worried about missing my flight.
When you think about how irrational this fear is, it is almost laughable. In 43 years I have never missed a flight. Even if I did, there are very few things that I absolutely need to get home for that couldn’t be covered with the help of family, friends or co-workers.
Similar Fears for Investors
This fear I suffer from occupies way too much mindshare. Unfortunately, I think investors have similar unnecessary fears when it applies to investing.
One fear that many investors worry about is the amount of time it takes to recover from a market downturn. I think this fear tends to gain momentum as people edge closer to retirement and have less time to ride out downturns in the market. This fear is obviously more rational than my missing-a-flight fear; however, if this is put into context it may not be so scary.
Consider Income Needs for the Next 5-10 Years
Most investors, in my experience, do not need to spend all of their portfolio in a short period of time. Retirees typically only spend a small percentage of their portfolio on an annual basis to help supplement their income needs. Typically, the portion of the portfolio needed for income within the next 5 to 10 years should be invested more conservatively.
One popular investment that may be utilized for this short-term need is high quality bonds. High quality bonds carry significantly less risk than stocks. Stocks generally should only be considered for the portion of the portfolio that is not needed for income in the next 5 to 10 years, as stocks may inevitably decline in value for extended periods of time.
Market Recovery Time May Be Shorter Than You Think
In addition to making sure that an ample amount of money is invested more conservatively for the short term, a second item that may provide peace of mind is the length of time it has historically taken for markets to recover. I believe that there is frequently a disconnect between the actual versus the perceived amount of time it takes for markets to recover.
Historically, the inevitable declines that impact the stock market last for shorter periods of time than most people think. Take a look at this graph provided by the Capital Group contrasting how long bull markets and bear markets have lasted, going all the way back to 1949.
The graph illustrates that the average bull market lasted 71 months, and the stock market increased on average 263% during these increases. The average bear market resulted in the stock market decreasing in value by -33%, but lasted only 14 months, on average.
Calming Your Fears
It is inevitable that we will continue to see decreases in the stock market in the future. If you are having difficulty calming your fears please remember two things:
- We are monitoring your investments throughout the year.
We are only a phone call away if you need to talk to us about your portfolio.
I hope you have a happy Easter season and are able to get out and enjoy the warmer (or, snowy?) weather!
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The S&P 500® is a market capitalization-weighted index of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
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