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What To Do About The Market Down Turn

The Coronavirus

Today my kids are 22, 16 and 13 years old. I am very proud and fortunate that all three kids are healthy and doing well. My wife and I periodically reflect on the types of parents we were when the kids were younger. I certainly wish I could go back in time when my kids were young and change how I was as a parent. Back when the kids where younger I was less sympathetic than I am today. When my kids did something wrong I naively thought that I could logically explain what they did wrong in a manner where they would see the value and immediately change their behavior. It only took me around 15 years of parenting to learn that young children don’t frequently respond well to logic especially if they are in an emotional state. Although I can’t go back in time to be the parent that I wish I could have been early on, I was able to learn a valuable lesson. The valuable lesson that I learned is that people of all ages place a greater emphasis on emotions over logic when making decisions.

A good example that illustrates logic losing out to emotions in the decision-making process can be witnessed in the recent stock market decline due to Coronavirus fears. Despite the fact that the seasonal flu, norovirus, and rotavirus are presently killing over 4 times as many people daily than the Coronavirus, the world’s reaction to this “Pandemic” has actually created negative economic consequences. In other words, at the present time, it is not the Coronavirus that is the issue, it is the global reaction to the Coronavirus that is the issue. Regardless of if you believe the hysteria surrounding this virus or not we can agree that on 3/11/2020 we entered bear market territory where the Dow Jones Industrial Average lost over 20% from its previous high. If we take a long look back into history you can see that bear markets are not that rare and the stock market’s response following bear markets is on average quite positive.


Market downturn in the past century

Source: ISI, Bloomberg, National Bureau of Economic Research, Haver Analytics, FMRCo (Asset Allocation Research Team) as of February 26, 2020. Data based on S&P 500 Index price returns. Duration ends with a complete retracement of losses. Recessions are defined by the National Bureau of Economic Research. Past performance is no guarantee of future results. You cannot invest directly in an index. The S&P 500®, a market capitalization-weighted index of common stocks, is a registered service mark of the McGraw-Hill Companies, Inc. and has been licensed for use by Fidelity Distributors Corporation.

As you can see from the graph1 we have had 12 bear markets since 1940 excluding the most recent bear market. A bear market typically means that securities fall by 20% or more from their previous highs. The worst of these bear markets occurred in 2007 and lasted 2 years and 3 months. One notable item to consider when reviewing the chart above is the strong 1-year stock market performance that follows bear markets. The unfortunate reality of this information is that it is very difficult to determine when the bear market is going to end signaling the strong 1 year returns that are likely to follow.

The greatest investor of our time as measured by net worth is a gentleman named Warren Buffett. Warren Buffett was quoted as saying “The only value of stock forecasters is to make fortune-tellers look good.” Despite the fact that the greatest investor of all time has consistently spoken about the downside of trying to time the stock market many investors still fall into the market timing trap. To help people justify their emotionally based market timing decisions they will frequently confirm their beliefs by reading or listening to something that agrees with their decision. I can tell when people have sought out advice that confirms their beliefs as they frequently tell me that “This time is different”.

What Should You Do?

Ensuring that your portfolio is diversified according to your risk tolerance and goals while being acutely aware of the tax implications of your investment decisions are all variables that you can control. Attempting to time the market over short periods of time is not something you can control. Some of the biggest losses we have seen over the 35 years our firm has been in existence can be traced back to people selling their stock related investments in the midst of a bear market. We encourage you to try your best to use logic rather than emotions when making decisions during this difficult time. As always, please give us a call to address any concerns that you may have.

1. Source: https://www.fidelity.com/viewpoints/market-and-economic-insights/bear-markets-the-business-cycle-explained (accessed 3/12/2020)

Definitions: Dow Jones Industrial Average: A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest US companies are performing. Source: Nasdaq https://www.nasdaq.com/glossary/d/dow-jones-industrial-average

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Bernicke Wealth Management, Ltd. (Bernicke) is an independent, multi-disciplinary firm with 25 employees located outside Eau Claire, in Altoona, Wisconsin. Our financial advisers provide wealth management services for individual investors, businesses, foundations, and nonprofits, including investment planning, retirement planning, estate planning, and tax planning.

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Learn why you may be able to retire earlier than you think.
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