Are you emotionally prepared for a correction or bear market?
Over my 36-year career, I have pretty much experienced a 15% correction most every year - at least on average. Corrections are as common as dirt.
And on average, every five years or so, these corrections turn into a bear market—or a decline of 20% or more. The average bear market decline is approximately 30%.
Seeing a third of your stock portfolio’s value seemingly disappear is no laughing matter. I say “seemingly” because if history is any guide, the stock market itself cannot cause a loss. Losses in the stock market, as long as one is broadly diversified, require human intervention. You have to do something to turn a temporary decline into a loss.
I don’t know when the next correction or bear market will begin. Risk takes all forms. But I suspect the most significant economic risk is what no one’s talking about. If no one’s talking about it, no one’s ready for it, and because many will be unprepared for its damage, the damage gets amplified when it arrives. That’s because surprise is the mother of panic. And once the disease of panic sets in, there is no cure. It’s too late.
So I offer you today a financial lifeboat drill. Only a week or so ago, the Dow Jones Industrial Average hit a new high at 29,550.
If we experience a 10% correction, we will visit 26,595. We last saw that level on October 10, 2019, and people were thrilled to be at that level at the time. If we see it again, I don’t think folks will share the same joy.
If we enter a bear market, we will get to revisit 23,640, a level not seen since January of last year. When we hit that level the first time, folks were thrilled. If we visit that level again, panic will once again take over, and the financial media will once again provide us with a thousand reasons we should sell before it’s too late.
Finally, considering the average bear market will see a decline of 30%, again, I am taking the liberty of using the average, that means we would visit Dow 20,685—nearly a 9,000 point decline, taking us back to levels not seen since May of 2017.
The key is, you have to put yourself in a position where you can survive the short-term if you are to be successful in the long-term. Translation, you can’t let yourself become surprised over temporary declines regardless of how deep they are.
It’s better to have expectations that market declines will happen from time to time, but you don’t know when or where to rely exclusively on forecasts – almost all of which are generally nonsense and mostly backfire—causing permanent financial harm to investors
If you align expectations with a real world view, you will never be disappointed. As David Booth, the founder of Dimensional Fund Advisors, recently wrote, “If you’re living in fear of the next downturn, consider shifting your thinking instead of your investments.”
So whether we see 26,595, 23,640, or 20,685 before we see Dow 50,000, the key to your lifetime investment success is to remember what Marcus Aurelius suggested, "The nearer a man comes to a calm mind, the closer he is to strength."
Paul A. Ruedi has been serving people as a financial advisor and retirement planner for over 36 years. In 2014, he founded Ruedi Wealth Management, and currently serves as CEO.
Paul has shared his knowledge on financial issues as the host of Paul Ruedi’s “On the Money” Radio show on Newstalk 1400 WDWS for over 25 years. He has provided his insight for publications such as the Wall Street Journal, Forbes, US News and World Report, Investor’s Business Daily, and Investopedia.