At What Point Should I Sell In A Bear Market?
The S&P 500 has officially fallen into bear market territory after it fell over 20% from its peak set on January 3rd. With the stock market continuing to decline, economists have begun to sound the alarms that a recession is becoming more and more likely to occur. While inflation continues to be high, the Federal Reserve has stated its main objective is to lower inflation to more normal levels, accepting the fact that a recession might occur as a result.
If the economists prove to be right and a recession does occur, should investors sell now to be ahead of the curve?
The answer is, probably not.
Markets are forward thinking, and based on the efficient market hypothesis the odds of a recession should, in theory, already be priced into the market. Markets might not know everything of course, and things could get better or worse from here. However, when we entered into a bear market during the COVID crisis, most weren’t predicting such a quick and strong recovery as the one that occurred. If you had sold then, you would probably be regretting having done so.
Maybe you have heard the old adage “time in the market beats timing the market” before. The illustration below shows why that philosophy is so important. Missing some of the markets best moments, even as briefly as one week, can end up costing you in the long run. Staying appropriately invested can be a challenge, but hopefully this illustration helps put into perspective just how important it is.
Source: Dimensional Fund Advisors
The above shows the growth of $1,000 if it was invested in the Russell 3000 index in 1997. If you had held steady, that $1,000 would have turned into $10,367 by the end of 2021. However, if you decided to sit on the sidelines for the best week (week ending Nov. 28, 2008), that theoretical growth falls to $8,652. The longer you miss out on strong market returns, the more of an impact it has on your overall portfolio performance. Yes, if you manage to sit on the sidelines for the worst performing periods, your portfolio will perform better. But being able to sit out on the sidelines for bad stretches, while simultaneously buying back in before the good stretches, is easier said than done.
While bear markets can be short-lived (the shortest was just 33 days) like the one experienced in March of 2020, the average bear market lasts 289 days. The longest bear market on record occurred in 1973-1974 and was a whopping 630 days. However, the average bull market lasts even longer, 991 days!
Being able to withstand market volatility is not easy, and is exactly why we issue Investment Policy Statements. Even then, some people overestimate just how much risk they can mentally handle until that volatility in the market occurs. But over time, markets do tend to recover quite well.
Source: Dimensional Fund Advisors
The above graphic from Dimensional Funds illustrates the average cumulative returns following a 10%, 20%, and 30% downturn. The main takeaway from this isn’t that you should expect these returns, but sticking with a plan over the long run should allow for your portfolio to rebound. There might be short term pain, but thinking long term is crucial to reap the rewards that the market offers.
In a bear market, there are a few things to consider:
Is now a good time to rebalance?
Is my portfolio properly diversified?
Should I be tax loss harvesting?
Am I able to save more than I currently am?
It’s possible that your desired asset allocation has drifted far enough away from the desired percentages, which makes rebalancing your portfolio an attractive option. Additionally, tax-loss harvesting is a way to offset capital gains or even reduce $3,000 of your taxable income. Given the current market conditions, these are all things to consider at the moment. If you have any questions or concerns regarding the current bear market, our views on a possible recession, or the status of your portfolio, then please reach out to us at 330-562-2122 or via our Contact Us page.