Anti-equity investors throw that line at me every once in a while. I want to preface this article by saying that investing in a diverse portfolio of equities (stocks) is one of the most proven ways to gain wealth over time. I’m a huge fan of equity investing. When it comes to the stock market, it has historically gone up – way up – over time. However, there are some pretty notable dips along the way.
That said, not everyone should be in 100% equities. My own 401(k)? It’s 100% equities. That DOES NOT mean that yours should be. Because remember, what goes up does come down… for a time. This blog is to get you thinking about what your unique allocation (stock to bond ratio) should be.
Take a look at the chart below. Since the 1950s, there have been ~13 bear markets. A bear market is a decline of 20% or more in the stock market, but I’m including a few that were down 19%. While it has only taken an average of 11.3 months for a bear market to turn into a bull market (come up 20% from their lows) it takes an average of 31.8 months to fully recover.
I know that bear markets happen, and I STILL love equity investing. I know that even though there are dips along the way, it is a proven way to build wealth if you stick to a long-term investment plan.
That said, I do want you to think about what I said earlier. The average bear market is down 32%. We’ll round down to 30% for example’s sake:
Let’s say you have a $100,000 portfolio. What if you checked your account 6 months from now and saw it had dropped to $70,000? Now imagine you have a million-dollar portfolio. You check your account and see it down to $700,000. That is over $300,000 of value lost (albeit temporarily). How does that make you feel?
Are you panicking?
Are you losing sleep?
Are you regretful? Anxious? Picking up the phone to call your financial advisor to move to cash?
No? Well good. Stick with your current plan.
But, if that IS you, and the thought of losing 30% of your portfolio during a bear market makes you sick, you need to talk to your financial advisor. You need to ensure that your portfolio is invested more moderately to match your risk tolerance.
I am writing this blog now because the market is doing great! Year-to-date, the S&P 500 is up 26%. If you want to make a change towards conservatism, the best time to do it is during a strong market. You DO NOT want to sell equities after the volatility has already come.
I often see investors pay little attention to their portfolio when it is doing well and only ask, “Am I invested too aggressively?” once the portfolio has already taken a hit. Ask the question now. It’s a conversation that needs to be had. Your advisor wants you to feel confident in your portfolio no matter what happens in the market!