In the bear market, you need to have a plan
If you are an investor or a 401(k) participant, we need to talk. I want to share decades-long, in-thetrenches experience with you in my role as personal portfolio manager to wealthy families.
Thursday, over 2,300 stocks traded on the NYSE closed at new lows; only seven hit new highs. The DOW dropped 10%, the biggest decline since Oct. 19, 1987 — having fallen into bear market territory on Wednesday, March 11, 2020, with a drop of more than 20% from the peak of Feb. 12, 2020. Year-to-date, the DOW is down 25.7%.
The broad market, as measured by the S&P 500 Index, turned from an 11-year-long bull into a bear today (Thurs. March 12, 2020), after peaking on Feb. 19, 2020. Year-to-date, the S&P 500 Index is down 23.2%.
These dates will be important historical markers for investors — creating stories for you to tell your kids and grandkids someday in the future, about how the coronavirus started a market meltdown that scared people into selling their stocks and rethinking their 401(k) contributions.
If you feel uneasy in this market period, that’s understandable. If you are on the edge of panic, that tells me that you don’t have a plan. Your plan needs to be grounded on your personal situation, your goals and your investment horizon.
For retirees, the plan is to augment Social Security and pension income with portfolio withdrawals. The optimal retirement portfolio uses a strategy I call “demand-based,” creating enough income from dividends and interest (not capital gains) to accommodate your needs. I’ve written about how to create and manage demandbased portfolios in a number of my books, including my upcoming book, “The Discerning Investor.” (By the way, I will send you a pre-release copy if you would like to do a review. Email me at readers@juliejason.com.)
The suboptimal portfolio requires a retiree to depend on gains to live — that’s the retiree who is at risk in today’s market environment.
You can’t live on gains if there are none.
For 401(k) participants saving for retirement, the plan is to take advantage of the benefits that 401(k)s offer, especially the pretax savings advantage and the company match. Those advantages do not go away in down markets.
Let me give you an example using a plan with a middle-of-the-road 50% match in the worst market we’ve seen in history — the Great Depression, when the market dropped about 85% over four years (19291932). A contribution of $100 a month means that $150 goes into the 401(k), but the cost of that contribution is far less. To give you a simple calculation, assume a 20% income tax rate. Your contribution of $150 would cost only $80 (your pretax contribution of $100 less $20 tax savings = $80 net cost.)
In comparison, for you to save $150 in your bank account, your “cost” would be $150. Your cost for saving $150 in this 401(k) is only $80.
Think about that a minute.
Even in a dramatically declining (85%) market, an investment in an S&P 500 Index fund would have made you a profit. (Your total cost of $3,840 ($80 x 48), ended with $4,300 for a return of about 12% over the four-year period.
Even though we’re not in Depression-like times, nor in the financial crisis, today’s financial markets could not be more uncertain. Keep in mind that interim market moves are fleeting. In 1987 the market dropped 34% during the year but ended up 2% for the year. 1998 was down 19% intra-year, but ended up 27% for the year.
During the financial crisis, the market was down 10% intra-year in 2007, but ended 4% up for the year. 2008 was down 49% intrayear, but ended the year down 38%.
In 2009, the S&P 500 Index declined more than 28% during the year, but the year ended up 23%. In the fourth quarter of 2018, the market was down 19.9%; the year ended down 4.4%. The next year, 2019, ended up 31.5%, after declining intra-year by 6.1%.
Markets such as these come along periodically Having a plan keeps you from letting emotions rule the day.