There’s Always a Pessimist

Market analysts will always find reasons to report a bear market is coming soon. I found various articles over the 2010s pointing to an imminent downturn. Eventually, the market bears will be correct. They just weren’t in the last decade. In the 2010s, the S&P 500 generated average annual returns of over 13%. And 2020 and 2021 returned over 18% and 28%. If you followed pessimistic advice and remained out of the market, it has been a tough decade to watch from the sidelines.

Pessimistic Articles

Forming your investing philosophy around these articles will frustrate you. There’s always a pessimist. Here’s the latest negative article I found for 2022:

2022 – The next recession. Caused by the Fed Reserve raising rates to combat inflation, triggers a recession
The next recession: Here’s when the ‘everything bubble’ will burst (yahoo.com)

Let’s take a look at some article headlines from the last decade:

• 2011 – Recession caused by declining GDP, bad manufacturing data, looming government debt in Europe And Now Here Comes the Recession of 2011… (businessinsider.com)

• 2012 – Eurozone debt, declining manufacturing data Global Economic Crisis 2012 | HuffPost Impact
• 2013 – Increased government spending, Obamacare creates business uncertainty The Coming ‘Obama Recession’ Of 2013 (forbes.com)

• 2015 – Oil prices plummet and US dollar is too strong US could go into recession in 2015: Expert (cnbc.com)
• 2016 – low oil prices and negative interest rates The Great Recession Scare Of 2016 (forbes.com)
• 2017– political uncertainty over Trump presidency Recession in 2017? (forbes.com)

• 2018 – Asia weakens, US & China trade tariffs, Brexit uncertainty 2018: The worst year for stocks since financial crisis | News | DW | 01.01.2019
• 2020 – Coronavirus U.S. Recession Model at 100% Confirms Downturn Is Already Here (bloomberg.com)

There’s always a pessimistic view. They’re sensational. How do you respond to these headlines? We live in a 24-7 culture. The latest story is a swipe, click or Alexa command away. Pessimistic headlines remain popular and are always available. Here’s the S&P 500 performance since 2010:

As an investor you should know the stock market averages a 10% correction every 1.6 years:

The market travels upward over time, just not in a straight line. Every year there are pullbacks, some more severe than others. A look at it from JPMorgan’s Guide to the Markets:

From the slide we see how often the market drops 10%, 20% or more. And we see the rest of the story, which is that it finished positive 32 out of the last 42 years (76% of the time).

A Tale of Two Investors

Let’s compare two investors, Tommy Timer and Rip Van Winkle:

Tommy Timer:

• Reads sensational market new stories and jumps out of the market every time there’s a 10% correction
• To the detriment of his mental health, he’s always focused on the value of his portfolio and what the markets will do next
• He is reluctant to re-enter the market even after it has risen back above where he exited. He’s always thinking another crash is around the corner.
• He’s not as effective at work, due to his frequent market “research” during the workday. He misses opportunities to learn new skills, request pay increases or apply for other jobs – his income stagnates
• His relationships suffer because he’s distracted by his investments. Not everyone he encounters wants to discuss market conditions or hear of his investing skill.

Rip Van Winkle:

• Rip stays in his lane – he knows he’s not a hedge fund manager, economist or day trader. He doesn’t focus his mental energy on markets beyond his control.
• He dollar-cost-averages into basic stock index funds. Knowing that over time the markets will rise.
• Sleeps well at night knowing he can’t outmaneuver the market, so he doesn’t try. He is content with average stock market returns.
• His personal and work life excel because he focuses his time and energy on things he can control. Skills, hobbies, relationships, health.

How to Prepare

2021 was kind to investors with only a 5% intra-year decline (rare, because in a typical year it’s 14%). Consider this information and pre-determine what you will do when the market corrects. A few thoughts:

• It’s WHEN the market corrects not IF
• Through dollar-cost investing, you buy shares at lower price levels during any correction. Lowering your average price in the fund(s).
• With a long horizon, buying more shares at lower prices accelerates portfolio growth. Purchases at lower prices become most valuable.
• Now is the time to determine if your portfolio has the appropriate risk level. Do you have the right percentage in equity investments?
• What return do you expect from your portfolio? Ensure your expectations are based on historical reality.

Plan your response to market declines now. Expect them and know how you will react. Formalize your investment philosophy and stick to it. And remember there’s always a pessimist.

Want to read more?

• My personal cautionary tale – My 500k Lesson – a trip down memory lane | FI Chronicles
• Financial Policy Statement – FI Chronicles Family Financial Policy Statement | FI Chronicles