27 Oct 2022 Are You Averse to Adverse Market Conditions?
Yesterday, I logged into the Schwab website to inspect the damage the recent bear market had inflicted on my portfolio. It was just as I expected, down about 18% year to date. As I reviewed my accounts, I thought of you. At Beacon, we invest our money the same way we invest our client’s money. We use the same selection of Vanguard and iShares exchange traded funds in our Charles Schwab accounts that we use in yours, so we experience the same ups and downs that you do. Many of you have told us that you’ve adopted the reasonable strategy of not checking your account balances this year. And so, as I entered my passwords, I wondered how you might feel as you logged in for the first time in a while, too.*
Back in June, I wrote a Friday Brief about how the current pullback might feel more challenging than the ones we’ve lived through in the past. In it, I suggested that we might experience the gyrations in the stock market differently depending on the size of our portfolio relative to our past balances, our life stage, and the causes of the volatility. Personally, seeing a big dent in my portfolio didn’t bother me that much. I’ve been doing this long enough to know that bear markets come with the territory, and I’ve got 15 or 20 years before I’ll need to spend from my portfolio. However, I understand that many of you have less tolerance for the ups and downs of the stock market and less time for your balances to recover.
It’s for that reason, I wanted to acknowledge that it’s hard to see your portfolio decrease in value. In fact, for most people, the pain of losing money is psychologically twice as powerful as the pleasure of making it. It’s called loss aversion and I’m subject to it, too. Even though dramatic swings in my portfolio balance don’t throw me off center, I still don’t like seeing my portfolio drop in value any less than you do. It would be wonderful if we could get all the upside of the stock market with none of the downside. Unfortunately, that not how it works. If there was no risk associated with investing in stocks there would be little return available, therefore, we must live with this current bear market. That doesn’t mean there’s nothing you can do. If fact, I’ve written about potential ways to survive a bear market here and here.
At some point, the selling will end, and our portfolios will recover. The average bear market lasts 289 days, or about 9.6 months. The current one officially began on June 13, 2022, but the stock market began to fall back in January of this year. I don’t know how closely the current bear market will adhere to the average, but I do know that history tells us that the stock market often starts to recover well before things seem to be getting better in the economy. Let’s hope the Federal Reserve can put a lid on inflation quickly so we can get back to building again.
Most importantly, please feel free to reach out to us if you you’re feeling concerned or have questions.
*I’m not suggesting that your check your account balance today. If you’re a Beacon client or if you’re confident that your portfolio was set up well prior to this year and you’ve adopted an ignorance is bliss strategy, then please continue.
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