The Only Way Is Through

Just like any other calamitous event in life, navigating downward market trends requires perseverance.

By now you’re all experiencing some reaction to the markets. 2022 has been a rough year for investors with very little hinting at better news in the near future. Handling market news is not easy—especially with longest running bull market in U.S. history only just in the rearview mirror.

Navigating down periods in the market requires the same mindset to effectively manage any distressing event in life outside your control. Compare this environment to any other obstacle you’ve faced in your lifetime; how does one best navigate through times in our lives when things are not going our way?

The only way is through.

Originally stated in Dante’s Inferno, part of The Divine Comedy, Virgil is escorting Dante through Hell, Purgatory, and Heaven. While sailing in a one-way current they arrive at the gates of hell. Looking in, Dante sees the great horrors inside and is gripped with great fear realizing there is no way back. He asks Virgil how they can get out of the terrible situation facing them, and Virgil replies “the way out is through”.

Our current saga mirrors this scene in so many ways. Virgil and Dante “sail” through the current going in one direction. Much like the previous five years in the market, when investors sailed along with very little concern in the world, going where the market took them. Then, just as Dante looked through the gates and saw what they were approaching, there were many investors who looked head in 2020 and saw what was potentially coming on the horizon. Even now, we can see the difficulty of avoiding a recession with the Fed being forced to raise rates quickly—and if they act too quickly the economy will slow down significantly. Virgil can see the terrible situation—just as many of you have identified our current mess.

So how do we get through it exactly?

Define the problem.

Let’s consider the problem. Most likely the problem is you have monies invested and want it to go up as you are counting on that growth to help provide for your financial future. Right now it is not going up and in fact, you are losing money you’ve already invested.

Further compounding this problem is that not only is the equity market going down, but so is the bond market as interest rates rise, and cash is losing value as inflation ravages your savings.

Ultimately, if you could imagine a financial hell, this might be it.

Tempting solutions.

Panic, sell, and in the future proclaim investing is really gambling or blame the investment manager for poor returns.

Panicked investors are the most difficult to “convince” to stay the course—as long-term market returns require exactly that—long-term investing means continuing through even during periods of upheaval.

When we panic not knowing how to approach the problem, or want to run away from the problem, the urge that “someone should do something” overtakes. In down markets this leads investors to perform actions that at best do nothing, but most often are actually opposed to their interests.

Just like any crisis solution, simply taking action regardless of the direction does not solve any crisis and in fact can compound the problem. History has shown countless times (and in all the down markets any reader has experienced), that selling in a down market is not a long-term winning strategy.

Try To Overthink or Outsmart the Market Cycle

I find most investors are the undercover panicked investors. A lot of people believe they are confident and calm investors during periods of growth but once the market takes a downturn and economic news becomes negative, they look for ways to “outsmart” the market or “avoid” the downturn. This one may also be the most detrimental, because it can cause investors to believe they are “doing something” that assists in mitigating the downward impact on their returns when really they are just adjusting their portfolio on bad news, which is just attempting to time the market.

If you’ve tried to change asset classes in the middle of this downturn, this is you.

Actual solutions and outlooks dependent on your stage in life.

We want to consider strategies to mitigate any long-term damage you could wreak on your portfolio due to anxiety driven decisions. Consider what we know about markets:

• In the short term, markets go up and they go down. BUT, over the long haul, they go up.

  

• We do not know when they will go down. No matter what cycle of the market we are in, there are always experts predicting a downturn. Do that long enough, and at some point you will be right.

• We do not know when the market will go up. In fact, just last week the a little bump back up cycled through the market. Any investors who had sold into cash prior to that did not participate.

• Nobody has a superior strategy to beat the market. If they did, they would not need to sell you that strategy (they would simply implement it and never work again.)

Now is the time for stoicism.

First, one remains calm (ideally). Letting fear and/or emotion dictate how you navigate a challenge or even tragedy clouds your judgment as to how best proceed.

“How does it help…to make troubles heavier by bemoaning them?” – Seneca

Has any adverse event or tragedy been alleviated by wringing one’s hands and proclaiming the world is ending?

When life events unfold in an unplanned way, one cannot just pack up and go home. Anyone who has started a business, raised a family, been married, had family squabbles, been sick, lost a loved one, faced any other challenge, or exists on planet Earth knows you can’t just take your ball and go home when things go south.

But just like any challenge the right thing to do is definitely the hardest. Depending on your age or financial stage, here are some things you can actively do to mitigate poor outcomes due to a down market cycle. Note, these poor outcomes are caused not by the market but by making poor decisions during market changes.

Grin & Bear It

For all investors (young, old, novice, or qualified), don’t obsessively check your investments during times of upheaval (or often times during bull runs as well). Try to avoid the negative news, or at least limit it—and remind yourself this is part of investing.

Accumulators

For those that retirement is five or more years away and you are still accumulating wealth and investing in things like your employer provided retirement plans: DO NOT STOP. In fact, now is the time you may be able to purchase into the equity market at a “deal.” If anything, if you can increase your savings rate while the market is in a downward trend, you will improve your long-term returns.

Recent Retirees

Emotionally, this can be the most difficult group to be in. You just stopped receiving a steady paycheck into the home and now your investments have declined, and you have expenses you need to cover possibly by selling at a loss.

First thing to do—cut back expenses as much as reasonably possible. If you were planning on making large expenditures such as buying a new car—delay it for another year or more while this market cycle lingers. By avoiding selling some of your investments at a loss you can enable them to recover when the market cycle returns to growth.

Another thing to consider is your cash positions. If you have a large amount of cash (more than a year of savings), begin utilizing this to supplement your lifestyle in lieu of selling investments. Ultimately, to the maximum extent possible, you want to avoid selling in a down market to sustain your lifestyle.

Future Retirees/Long-Term Planning

Once this market cycle is past us, begin considering for the future how much cash you need to get through another down market. Depending on the level of investments you have, ideally you could maintain a cash position large enough that during the next downturn you can utilize those monies to supplement or cover your lifestyle while your investments rebound. During the last bull market, many investors stashed cash as the market continued to soar. This was so when the dip came, they could burn the cash and let their investments remain the market. Note, however, high inflation makes this strategy less appealing.

What you can do right now.

My advice—close the tablet, phone, or computer. Focus on your life right now. Your financial future depends on you not reacting now. We must march through this current cycle, facing it for what it is, and mitigating as best we can through cutting expenses, not selling positions, and not panicking. This period will end and another bull market will reign. Never short the American economy.