This summer, the Dow Jones Industrial Average, Standard & Poor’s 500, and NASDAQ Composite indices all reached record highs. It reminded me of a time not that long ago — December 1999 to be exact — when these three same indices, fueled by the dot-com bubble, reached all-time highs.
The party didn’t last long: The tech-heavy NASDAQ Composite proceeded to lose 80 percent of its value over the next several years.
It has been a wild stock market ride since 1999, one punctuated by two nasty bear markets. With the indices again reaching all-time highs, and with many stock market gurus calling for a steep decline, here are some thoughts to make the next bear market work in your favor and not destroy your financial resources, as happened to many investors during the bear markets of the past 15 years.
First, bear markets are a fact of life. As sure as the sun will set tonight, the stock market will someday temporarily lose 20 percent or more of its value. It might happen next year, or it might happen five years from now, but it will happen, probably several more times over your lifetime of investing. But, as was the case after the bear markets of 2000-02 and 2007-09, the indices will eventually rebound to new highs.
With that in mind, you can’t develop short-term anxiety with your long-term investments. What the stock market does over the next two years is irrelevant to your financial goals if you are allocated properly between stocks and fixed-income investments such as bonds and CDs.
This is especially important for retirees living on Social Security and drawing money out of their portfolios to cover monthly expenses. Bear markets are only a detriment to your financial well-being if you are forced to sell stocks at market lows to pay the electric bill. The retired investor who is properly allocated between stocks and bonds not only has enough fixed-income investments to cover monthly expenses, but bear markets also provide an opportunity to rebalance into common stocks at cheaper prices.
Bear markets allow investors to buy shares at lower prices, which translates into higher returns down the road.
Bear markets actually work in the favor of investors who have 10 or more years of saving and investing in workplace retirement plans. Bear markets allow these investors to buy shares at lower prices, which translates into higher returns down the road.
It’s frustrating watching one’s hard-earned savings decline during a bear market. But if you keep in mind that bear markets are a bonus to you over the long haul, it is easier to stomach the temporary market declines. More importantly, that mindset encourages saving and investing during these periods — the essential component to making bear markets work in your favor.
For most of my 33-year career in financial services, there was a reasonable alternative to investing in the stock market and enduring the temporary bear markets: 6 percent-yield CDs at your local bank. Not anymore. With rates on bank deposits and bonds at all-time lows, the financial goals of most people require investments in riskier funds that have the potential for higher yields. Keeping the next bear market in perspective will help accelerate your returns.