MARKET DOWNTURNS PROVIDE OPPORTUNITIES – EMBRACE THEM

written by Brent Soloway, CcFC®

Market Downturns Provide Opportunities – Embrace Them

One of the greatest challenges for investors is when the market experiences substantial downturns (which we shall define as 15%+ decline in value).  In 2022, the S & P 500 total return was a negative 18.1%.  From the middle of February through the third week of March 2020, the Index dropped approximately 30% (Covid Crash).  In 2008, the S & P dropped 36.55% and from 2000-2002, the Index fell approximately 36%.  WOW!!!  It appears that the best way to “go broke’ is to invest in the stock market.  Well, no so fast.

Let’s explore two reasons why people lose money investing in the stock market.

  1. Lack of monitoring cash flow
  2. Reacting emotionally

Let’s take a deeper dive:

  1. When investing is individual stocks, stock ETFs, or stock mutual funds, it is of paramount importance that you understand time horizon and market volatility. Depending upon your time horizon as an equity investor, it may be prudent to have a minimum 4-5-year time horizon for holding stocks.  This means having enough cash flow from whatever sources to fund your annual living expenses.  Selling stocks in a down market to fund short-term cash flow needs may lead to a devastating loss of total return over the long-term.   When you sell and spend, you have locked in losses that may never be recovered.  It’s possible you have jeopardized your ability to meet long-term goals for asset accumulation.  This is one definition of RISK (unrecoverable losses when investing in stocks).  If you have sufficient cash flow during market downturns, you are best served to be buying, not selling.  Why?  Because quality companies go on sale, they are cheap.  Who doesn’t like a bargain, I sure do.  By buying when everyone is selling, you may realize a greater total return in your portfolio than staying the course, or at worst, selling a downturn.  Remember, volatility is far different than risk.  Risk is a total loss while volatility is the inevitable movements, both up and down, of equity prices over time.  To simplify, buy low and sell high.  When stocks go up and your allocation of stocks to fixed income has exceeded your target allocation goal (i.e., 4%+), then pare back and sell, taking some gains.  Remember, CASH FLOW IS KING!  By monitoring your cash flow and making sure you don’t ever sell a downturn to fund short-term cash needs you shall be on your way to achieving your goals for financial independence.  However, there is a caveat, and leads us to reason #2.
  2. One of the biggest challenges an investor faces is maintaining “emotional” when the market is retreating, and account balances continue to go down. These are the times when people make the mistake of selling stocks in a market that has already gone down substantially.  This is one of the biggest mistakes an investor can make.

Consider this: according to a JP Morgan Asset Management study (1), someone who invested $100,000 in the S&P 500 index in January 2004 and left it to grow for 20 years would walk away with more than $640,000 by January 2024 for a 9.8% average annual return.  If a “sideline investor” was not invested in stocks on the market’s 10 best days between January 2004 and January 2024, their investments would have grown to less than $300,000 for a 5.6% average annual return according to JP Morgan’s data.  It would take approximately 15 more years at an average return of 5.33% to reach the $600,000 value of the investor that stayed the course.  Similar studies done over various time periods have yielded similar results.

There is never a “perfect” solution to achieve the results desired to meet someone’s long-term financial goals.  Everyone’s situation is different.  Someone at 70 years old may require a different strategy (have more years of guaranteed income).  The concept is the same for all ages, cash flow is a big piece of the equation.  One’s tolerance for variability is also important.  If you just can’t handle the ups and downs in markets, maybe other investment options might suit you better (i.e., real estate) Historically, there have been challenging times in the stock market.  In the 1970’s, the S & P Index went down approximately 32% (1974) and then went sideways for the next five years.  However, if you managed your cash flow well (and took some profits when the market was up in 1976 and 1979), your long-term plan would still be intact.

The bottom line is stay invested and make sure your guaranteed cash flow (i.e., income from work, pensions, annuities, social security, etc.) is sufficient to manage through difficult periods of market volatility.  If you can do that, and maintain an emotional equilibrium, you shall have an excellent chance to meet your financial goals no matter your age.

Opinions expressed in this article are those of the author/speaker and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Past performance may not be indicative of future results. Prior to making an investment decision, please consult with your financial advisor about your investment. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The stock indexes mentioned are unmanaged and cannot be invested into directly. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market.

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