“Buy and hold for the long term! Markets go up and markets go down but in the long run markets have gone up at an 8% annual clip.”
How does that make you feel? Better?
The market is dropping precipitously on a daily basis and all you are told is “to stay the course.”
However, your broker is not the one who has to live on these savings later in life!
Maybe this is how you felt during this most recent of two 2018 market swoons.
Really all you want is a straight answer and somebody who cares.
Well today, I hope to give you that answer.
Is This The Bear Market?
The answer is probably, but we will only definitively know in hindsight.
What we have seen is that the major indexes have given us a bearish divergence on our long-term (monthly charts) which usually means things have changed and the trend is changing.
We have trend lines being challenged and indicators that have historically signaled longer term downward price action crossing key levels, like the MACD histogram at the bottom of the above chart.
Do you need to panic yet? No.
Markets do go up and markets do go down and unless this is a market crash (which no one can predict), this market will bounce again.
The Big Question
The big question is when it bounces do you have a plan?
You know something other than “stay the course.”
Here is our plan:
Step one – take off some market exposure. Check. We did this early on in the decline.
Step two – wait on the bounce, see where it goes and make adjustments to market exposure as necessary. Adding on the rise, removing exposure on a peak.
Step three – continue to adjust exposure as necessary as market confirms trend change.
Step four – enjoy the circus as a hedged (or net short) participant.
Now I know this seems simple and believe me it is not. But does your advisor have a plan?
Our plan may not work out exactly as advertised but at least we are doing our job of trying to client protect capital.
What About The Fact That Markets Always Recover?
Great question and no doubt this one will recover (if you live long enough). The Great Recession of 2007—2008 recovered its losses in five+ years because of substantial government intervention.
The underlying excesses were never really corrected, just papered over. So with Federal Reserve interest rates still quite historically low and their balance sheet still very large, what are the odds they will intervene in any substantial way this time around?
I would guess, not very great!
So what if the recovery this time takes eight or even ten years? How would that affect your financial planning?
For most Americans, it would be devastating!
Here is the math for you technical few:
A 50% decline in the value of your portfolio requires a 100% return to get back to break even.
If the market average is 8% for the sake of argument, how many years would it take to recover just a 45% loss?
Almost 8 years.
So if we had a 50% decline it is quite feasible you could spend most, if not all, the next up cycle just trying to get to break even. Just reaching break even in time for the next bear market assuming a 10 year cycle, which is one of the longest in history already.
The solution is simple! You have to do something.
Don’t let some newly minted broker or advisor tell you to just “buy and hold.” In this market, that could be a recipe for disaster!
Let us know if we can help.