It should come as no secret to investors that bear markets (a decline of 20% or more from a previous high in the stock market) occur with random regularity. They are the price that investors pay for the long term superiority of stock returns over most other asset classes.
During the euphoria of bull markets, stocks can become overpriced on a historical basis. As greed drives FOMO (fear of missing out on rising prices), it is not uncommon to hear investors cry “get me in at any price!” Fear, on the other hand, is the hallmark of a bear market. Investors feel compelled to dump stocks, again, because of FOVG (fear of vaporizing gains).
During a bear market, it appears on paper, that some of the gains of the prior bull market are indeed being vaporized. This can be particularly discouraging for investors who are contemplating retirement in the relatively near future. They understand that their account value is the basis for how much income they can safely spend during retirement. With a temporary decrease in their investment base, they may be reluctant to retire until the market recovers.
Here are a couple of thoughts that may help you keep your retirement plans on track. First, you own SHARES of corporations. Despite the decline in the market, you still own those shares, assuming you haven’t sold them. The prices of those shares will continue to fluctuate during your retirement. That is a fact of life. It is also true that, long term, they are the best defense against rising prices eroding the value of your purchasing power.
Assuming that you are holding shares of some of America’s greatest corporations, e.g. Walmart, Amazon, Apple, Microsoft, McDonalds, etc., it is highly unlikely that they will lose their dominant positions to competitors. They will continue to innovate, to hire some of the brightest graduates from our universities, and change as the times require. From time to time investors will be willing to pay more, or less, for shares in their franchises. You are invested in businesses of enduring value.
Second, your regularly updated financial plan is the best way to ensure that you can comfortably afford to fund your goals. Your plan takes into account all of the important inputs affecting your financial life including rates of inflation, projected rate of return, draw rate, taxes, cash flow and stretch goals. Your plan is then subjected to monte carlo simulations that provide a probability of success percentage, as well as bear market testing of your returns.
I would like to conclude this Independence Day missive with some advice from my hero, Warren Buffet’s 2021 Letter to Berkshire Hathaway shareholders: “In its brief 232 years of existence…there has been no incubator for unleashing human potential like America…despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.”
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