Market sell-offs occasionally drop into bear market territory. In a Money Talk Video with Kyle Tetting, Steve Giles explains how balanced portfolios can prepare long-term investors for such downturns. A transcript of their conversation follows.

Kyle Tetting: Steve, we’re in the middle of a bear market. The last time around, the last time we dealt with this kind of volatility, post-COVID, things were over fairly quickly. This time around, things are lasting a little bit longer. Certainly, the volatility within stocks is on investors’ minds. How do you talk to clients about the environment we’re in right now?

Steve Giles: Well Kyle, I think it’s important to remind investors that bear markets come around every once in a while. We’ve actually had 27 bear markets since they’ve been tracking this the S&P 500 since 1928. Incidentally, over that same time, we’ve only had 15 recessions. I think it’s important that clients know that just because we’re in a bear market does not mean we’re in a recession. There are a lot of good economic indicators out there. I would encourage clients to stay the course with their investments.

Kyle: And of course, as we look at stocks, as we try to get this understanding of the role that they play in our portfolio, perhaps a reminder that we have to keep things in this longer-term perspective, that it isn’t just the current situation that drives the bus. The three-year numbers for stocks look quite exceptional, the three-year numbers for more balanced portfolios look quite exceptional. But beyond that, the stocks we hold, we hold for a reason.

Steve: That’s correct. We always hold stocks for the longer term. They’re going to outpace inflation. I have this conversation all the time with clients, Kyle, to remind them that we’re in the middle of a bear market that really is not as long as what the average bear market has been over the last 92 years. The average bear market is only about nine and a half months. You get about three and a half years from one bear market to the next. And that’s just the business cycle. For those investors that entered this bear market with the right allocation, they’ve actually held up much, much better than if all their money were invested in just the index.

Kyle: I think that’s the key: Having a plan as you enter this. Of course, typically part of that plan is that when stocks sell off, bonds hold up a little better. That’s not been the case this year, especially relative to what we normally expect from bonds. It’s been a rough year from bonds, and so how do you comfort investors through this idea that the bond piece isn’t maybe behaving as well as we would’ve hoped?

Steve: Well, there’s a few points I think that are worth making. The first obviously is that even though the stock market has been down this year and the bond market is also down, the bond market is not down anywhere near what the stock market is down. So yes, from a volatility standpoint, stocks have been more volatile than bonds. But that’s cold comfort when you look at your overall portfolio and everything seems to be losing money. Stocks and bonds traditionally move in the inverse. When stocks go down, bonds go up, and vice versa. But this year, in the face of what has been some Fed tightening in an effort to tame inflation, the bond market has really been up against significant headwinds in addition to the stock market trading down because of the slowing economy.

Kyle: So, you put all these pieces together and it fits into this diversification that Landaas & Company has talked about for decades, right? This idea that you can help mitigate risk by spreading it out, but also that you can maximize the return for that risk you’re taking. Of course, none of that says anything about those real short-term needs. So, how do you talk to investors about making sure that that short term is taken care of so we can get to that longer-term opportunity?

Steve: Well, I think it begins by making sure you have the right mix before the bear market starts. A model portfolio of say 60% of your money in stocks and 40% of your money in bonds will meet your required minimum distributions of 4% for the next 10 years. If you do the math and assume that this bear market is going to last for more than 10 years, you’re still going to have enough money. And that’s a really worst-case scenario. The longest bear market in history is nowhere near 10 years long. Another point to consider for investors is the fact that they don’t have to sell their stocks to meet their portfolio withdrawals just because we have to maintain that monthly income stream. Even though the bonds are down, they’re not down as much. We’ve got enough money set aside in bonds in a balanced allocation to provide income for clients. And if you go back far enough, just about everything in your portfolio, bonds and stocks, over the last two to three years, is net positive.

Kyle: That’s the key, right, is understanding timeframe, understanding that everything has its place, everything has its purpose. So if we enter these kinds of environments with the proper plan, with the proper allocation, with the proper diversification, we’ve tended to find out that things work out all right.

Steve: Yes, but humans are also victims of their most recent perceptions. We see that the market is down so far this year, and we want to extrapolate that out into the future. To remind clients, to remind investors that being an investor is much, much more than just six months of history, it’s decades and decades and decades. And even my younger clients, to tell them that, hey, you know, you’re in your 20s; you’re going to live through another 10, 15 more recessions in your lifetime. Just be ready for it. And that way, you’re always going to look smart.

Kyle Tetting is president of Landaas & Company. 

Steve Giles is vice president and investment advisor at Landaas & Company.

Video by Jason Scuglik

Learn more
2022 Investment Outlook Seminar, a Money Talk Video
What to know about bear markets, a Money Talk Video with Steve Giles
Safe investment withdrawals for retirees, a Money Talk Video with Art Rothschild
Be patient holding bonds as rates rise, a Money Talk Video with Steve Giles
Investors and the business cycle, a Money Talk Video with Dave Sandstrom
Investment balance: Find and keep, a Money Talk Video with Art Rothschild
(initially posted Oct. 29, 2022)

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