We were happy to see 2018 end on an uptick for the stock market after the return of volatility and some harsh reminders about negative returns. The fourth quarter had down months in both October and December, resulting in all of the major equity markets reaching “correction” territory which is defined as a return of negative 10%. We also saw other parts of the market reach a “bear market” which is defined as a negative return of 20%. It is important to note that market corrections are normal, expected, and factored into the long-term plans we design for clients. However, that knowledge doesn’t make it any easier to handle headlines about record market drops or concerns about what might happen next.

Although it’s hard to find a bright side in a down market, it’s important to put 2018 into perspective. We have been in a bull market since the end of the Great Recession in 2009. This has been one of the longer market rallies in history with positive returns in each of the 9 prior calendar years despite corrections in 2011, 2015-16, and in early 2018. We know that at some point the positive market run will end, but it’s impossible to know exactly when that turning point will be or how long we might be facing a down market. The following chart shows bull markets in blue and bear markets in red, along with how long they lasted and the returns during each time period (note that this data is through 9/28/18).

What we learn from this chart is that bear markets are expected to happen on a periodic basis, and although the downturn can be severe they don’t last as long as bull markets. In fact, despite the down markets, the long-term expected return for an investment in the S&P 500 (broad US equities) is around 8% a year. It’s also important to note that it’s very difficult to time the market by accurately guessing when a bear market will start and when it will end. Attempts to time the market means selling out at the right time and then buying back in at the right time. That combination is almost impossible and risks missing out on a market rally; as reflected in the following chart, missing a few of the biggest up days would significantly reduce your long-term performance.

The moral of the story is that it’s emotionally difficult to weather the storm when the markets are in a downturn. However, without knowing in advance how low they will dip or for how long, it’s important to stay invested in the market. Our long-term planning projections include data about down markets because we know they are an inevitable part of investing. In the meantime, actions we have been taking and will continue to make on behalf of clients include the following:

• Cash Planning – we work with clients to build plans to meet their cash needs. In many cases, this means that cash will be available without needing to sell any equities during a down market. As reflected in the first chart, most bear markets last two years or less so a cash plan will help provide conviction that clients can maintain their lifestyle and plans without a short-term impact from the markets.
• Emotional Response – this is a perfect time to evaluate your emotional response to what is happening in the markets. If the constant headlines about down market days are creating fear or uncertainty then it might be time to have a conversation with our team to make sure your investments are right for you. Most clients have a mix of equities and bonds that are designed to meet your long-term goals, but we also need to incorporate how you react to market movements.
• Portfolio Rebalancing – an important part of having a diversified portfolio is to make sure the mix of investments stays intact during the ups and downs of the market. Usually, this means reducing positions in the investments that have been doing best (selling high) and reinvesting that money into investments that have been lagging (buying low). For example, we have been selling equities to buy bonds over the past couple of years to make sure client portfolios didn’t have too much equity exposure which would increase the risk of their investments. In the current environment, we will most likely be trimming back on bond investments to buy equities.
• Tax Loss Harvesting – we have been monitoring client portfolios on a weekly basis to identify opportunities to sell investments that have lost money, capturing the loss to offset your tax bill. This process keeps your account fully invested according to the long-term plan.

We will continue to closely monitor market forces to keep client portfolios positioned to meet long-term goals. There are a variety of headwinds facing the market with a combination of domestic issues (government shutdown, rising interest rates, trade wars) and international concerns (Brexit, slowing global growth, trade wars), but nothing that looks like it will put an end to the recovery. At the same time, we continue to see decent economic fundamentals in the US with attractive market valuations (the forward-looking earnings for domestic companies look good and prices have gone down). Hopefully, the market will start to find more reasons for optimism and keep the long-term rally alive for a little longer. Either way, our team will continue to monitor markets and strive to keep client portfolios positioned for the future. In the meantime, feel free to reach out to the team at Flourish Wealth Management for more information or to revisit your long-term plan.