My daughters have taught me a lot about how to deal with uncertainty and fear. As soccer players they went through a period where they moved from soccer program to soccer program. They had been pushed out of one, through no fault of their own. At each new team they learned and grew and used the experiences to their advantage. Several years ago, they found their current club. Everything that they learned over the prior couple of years helped them to shine. They very easily could have walked away from soccer or accepted things the way that they were. But instead, they kept taking leaps of faith, moving forward, even if things were not working out as planned or hoped for. It was scary for them, but they are very brave.
The current market climate is not a scary one. Since the bear market lows from 2022 the broad equity markets have raced higher setting multiple new all-time highs. Corporate earnings are strong, interest rates have stabilized, and portfolios look good.
It is especially during these times that we must prepare for the next storm/difficult period. We have no idea what the difficult period will look like, when it will hit, or how it will affect our portfolios, but there is always a storm just over the horizon. This is the cost for generating attractive long-term rates of return that historically have far surpassed our true enemy, inflation.
The broad US equity markets have historically increased at an annualized 10%+/-. Inflation, the cost of living, has historically increased at 3%+/-. However, there is no such thing as a free lunch. The broad equity markets have historically declined by an average of -14% each year. Some years we notice and others not so much. In addition, about every five or six years the broad equity markets decline by at least -20%, typically around -30%. These bear market declines have on average lasted 17-months, typically taking 3.3-years to get back to prior highs. Obviously, some declines are much shorter (the one-month decline in early 2020) or much longer (the 31-month decline that started in 2000).
Why look at these periodic storms when the markets are doing so well? Just like the Stoics did before they began a journey, we must be aware of what could happen, what could go wrong. How best can we then prepare for these challenging times so that your portfolio and subsequent planning are insulated and protected? We always want to make sure that there is a smart place to access funds for your needs, whether it is a one-time need for a larger purchase or a recurring distribution. We always want to make sure that you have ample reserves in less volatile assets so that, if necessary, we can allow the equity portion of the portfolio to go through the current cycle.
This strategy dramatically increases the odds that you will be successful. Trying to avoid the periodic negative fluctuations in the capital markets has caused many investors not only to dramatically underperform but also to miss out on financial independence and creating an income stream that they are not able to outlive. As the great Peter Lynch once said, “Far more money has been lost by investors trying to anticipate corrections, then lost in the corrections themselves.”
Thus, while the markets continue their long-term upward ascent, we know that storms are brewing past the horizon. It is only a matter of time before the current upward trajectory is impacted. However, using history as the only guide that we have, any future declines are likely to be just temporary bumps in the road, on the path to financial independence and financial security. So far, they always have been. Hopefully knowing that you are prepared for whatever obstacles might come our way, will help you to be more comfortable and braver, just like my daughters have been on their journey with soccer.