"The Bear is coming! The Bear is coming!"
Indeed it is. Should you be worried?
No, if you have heeded my advice and diversified your portfolio and set aside a cash reserve. You folks can actually stop reading now. For everyone else, the answer is "probably not."
We’ve been on the cusp of a bear market for several weeks now, which would be the 29th bear market in U.S. stocks since 1929.
Because of the media’s fixation on the stock markets, you probably have not heard of the bear market in bonds, which is the first since the 1970s and, by some measures, the worst bond returns since 1842. Interest rates have actually been in a huge bull market for 50 years, which means they’ve steadily fallen. That trend has reversed now that they’re rising.
The prevailing emotion when any market is falling is likely to be anxiety. The cause of anxiety is a feeling of worry, nervousness or unease, typically when we anticipate a negative outcome to an imminent event or uncertainty.
What can you do if you're one of those anxious investors? First, acknowledge that whatever you are feeling, you are feeling. That’s a fact. It doesn’t help and probably is hurtful to tell yourself you "shouldn't" feel anxious over the decrease in your portfolio. There are many reasons why a person might feel anxiety around a decline in value. Some could be anchored in unresolved trauma from past experiences that may have little to do with the falling markets.
Here is some additional information that might be of help. First, there isn’t ever a time when we are "certain" about future prices and market trends. Any investment carries uncertainty, even if our brains don't always recognize it. For example, even cash in the bank has fallen in value by over 8% over last year at this time. The same dollar amount in your account buys 8% less today than a year ago. That is money most likely lost forever, unless we move into a deflation, which is highly unlikely. Investments in stocks, bonds, and real estate, which are all down in dollar terms, have the prospect of recovering their dollar and inflation losses.
Ironically, many people don’t believe their investments will ever recover to their former highs, fearing that even stocks will become worthless and their portfolio losses will be permanent. Neither of these have ever happened. They are remotely possible, in the same way that it's remotely possible an asteroid will hit Earth tomorrow. It's far more likely that, within a year or two, the market will again reach new highs.
The bottom line reason for anxiety is fear of being unable to pay for current or future living expenses. This is why I recommend that retired clients' portfolios include a cash reserve large enough to cover expenses for one to two years and help them weather market losses. It's those who need income from their investments to pay their bills now who are the most at risk of locking in their losses.
In the big picture, the S&P 500 remains more than 16% above its pre-COVID-19 high in early 2020, something that could not have been predicted when the pandemic hit. The current downturn was completely predictable. All bull markets have eventually become bears and then turned back into bulls again.
Even if most people believed this historic data, we would probably not see an end to anxiety. I suspect some degree of worry is part of the human condition. Yet when it comes to market turbulence, the most effective way to reduce anxiety may be an appropriately diversified portfolio.
Rick Kahler is president and owner of Kahler Financial of Rapid City.
This article originally appeared on Aberdeen News: Diversified investing helps combat bear markets