How to Stand Up to a Bear Market

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Young investors can consider the huge fall in stocks this year as a buying opportunity. Old investors will not be able to wait for recovery.

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US stocks are down 22% this year, with the Federal Reserve raising interest rates by 0.75 percent this week, and inflation rising to nearly 9%; Bonds are down 11%. Recovery may take longer than some older investors.

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How well you get out of this downturn depends partly on how long your horizons are, but more importantly, how you respond. It’s human to feel like you have to sell something, anything, before the rest of your property can be broken into pieces. It is also human to be paralyzed by the fear that any action you take will make everything worse.

Some brave investors will also see this fall as an opportunity to buy more assets at lower prices. Others are happy to earn good return on cash after almost zero returns for more than a decade. And it’s important to remember that even after this year’s shock, US stocks have risen about 13% annually over the past decade.

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For almost everyone, whether you buy or sell a particular investment now, it matters less for your future wealth than a few sustainable behavioral changes that can keep you on the right track.

Whenever the market is worrying, it helps to look at historical precedents. How bad can things get?

In this case, what American investors probably fear most is a repeat of the stagflation recession from 1966 to 1982, when economic growth was spotty, Double digit inflation for years And the stock completely went nowhere.

On February 9, 1966, the S&P 500 closed at the then-record 94.06. After more than 16 years, it stood at 102.42 on 12 August 1982.

Corporate earnings fell by 15% after inflation, according to statistics From Yale University economist Robert Schiller.

Yes, the shares paid generous dividends, reaching nearly 6% by the end of the period, but inflation consumed them all.

That period was a test that turned the individual investor into an endangered species.

In 1979, Business Week magazine declared “death of equities“And for good reason.

In 1970, according to survey of houses By the Federal Reserve, 25% of households invested in stocks; By 1983, only 19% did. Between 1970 and 1981, total assets invested in stock mutual funds declined from $45 billion to $41 billion, According to the Investment Company Institute,

Worst case doesn’t get much worse than this. Although many investors gave up in those grim years, how did those who stayed fare?

We can’t say for sure, because automatic investment plans, which enable you to make purchases in regular increments over a long period, were not widely used In those days.

According to Morningstar, if you were able to sink $100 into U.S. stocks in each of the 199 months from February 1966 to the end of August 1982, that $19,900 in your cumulative investment would have left you with $18,520.

By 1982, the purchasing power of $19,900 in 1966 dollars had shrunk to about $11,000, estimates Nick Magiulli, chief operating officer of Ritholtz Wealth Management in New York and author of “Just Keep Buying,” a book on automated investment strategies.

While investing on autopilot may not guarantee a positive result, it does apply. discipline,

Investors who dump all their money at once are more likely to showing regret And bail in a bear market. People who invest like clockwork worry less about buying at the wrong time, which makes it easier for them to stay the course.

Sticking to the plan is especially important for young investors who have longer horizons. A plan can help them treat falling markets not as a disaster but as an opportunity.

Warren Buffett famously said that investors should think about stocks like hamburgers.

If you love burgers, you should root for their price to go down, not up—and the younger you are, the more food you’ll have in the future.

Similarly, “only those who will be sellers of equities in the near future should be happy to see a rise in the stock,” Mr Buffett wrote in 1997. “Potential buyers should prioritize the drop in prices.”

I like to say that the problem with stocks is that they contain the letter T. If they were called socks instead, people would consider the 20% drop in price not as a sale but as a sale.

When socks become 20% cheaper, you don’t rush to get rid of socks you already have; You check your sock drawer to see if you need a few more pairs. Young investors should treat stocks the same way.

To be sure, stocks still aren’t cheap. historical standard,

But youngsters looking to build long-term wealth should be more than happy to buy stocks after this year’s 20% drop than they were during its 114% rise before.

One good news for investors young and old is that the return on income-producing assets is rising.

“Throughout history, the way most people thought about money was not how much you had, but how much income it could generate,” he says. James WhiteChief executive of Elm Partners Management, an investment firm in Philadelphia.

As interest rates have climbed, so-called real returns on long-term Treasury inflation-protected securities, or TIPS, increased rapidly Up to 1% this year. This measure tracks whether these securities pay investors higher than expected inflation. It started at minus 0.43% in 2022.

So, Mr. White points out, a $1 million investment in TIPS can now generate $10,000 in annual income, essentially risk-free, after inflation. As recently as April, that same $1 million would not have produced inflation-adjusted income.

“Investors in or near retirement should think about money,” says Alan Roth, financial planner at Wealth Logic LLC in Colorado Springs, Colo. The money is likely to run out.”

When your portfolio is down, you may have to step up. It means making some sacrifices and postponing gratification.

First, suggests Mr. Roth, “retire slowly,” by which he means you should consider taking a part-time job early in your retirement. This will reduce the amount of money you need to withdraw when your investment declines.

You must also delay taking Social Security until age 70.

Think of it as a guaranteed, lifetime, inflation-adjusted annuity. The federal government increases what it pays each year in response to inflation, and increases the final payment to any recipients who hold off on getting their first Social Security check. So deferring benefits assures you of a significantly higher payout, especially with the rise in inflation.

According to Mike Piper, an accountant in St. Louis, your future profit after inflation will increase by about 6% to 8% for each year you delay. OpenSocialSecurity.comA website that helps people determine the optimal age to file for benefits.

During a bear market, it is important to spend less; It’s painful to finance your lifestyle by selling properties that drop in price.

“You can be more flexible with your discretionary spending in retirement,” explains Maria Bruno, head of financial-planning research at Vanguard Group, when unavoidable expenses like medical bills are less likely.

When financial markets bounce back, she says, you can “adjust your spending favorably,” take a little more As their value recovers from your investment portfolio.

Ultimately, whether the market rebounds rapidly or slowly is up to the bears. How you respond is up to you.

[email protected] . on Jason Zweig

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