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5 Mistakes to Avoid in a Bear Market

The attack on your stock holdings came quickly this time, but it’s never too late to dust off your bear market survival kit. Surviving a steep stock market slide is often more about riding out the storm than running away from trouble.

By bear market standards, the recent sell-off was super-fast. It took 16 days for the Standard & Poor’s 500 stock index to fall 20%, the quickest transition from bull to bear ever. But the size of the drop, at least so far, has been below average. At the bear market low on March 23, the broad market gauge was down about 34%, shy of the 40% dip suffered in bears since 1929, according to S&P Dow Jones Indices.

Still, this bear market, like all the prior ones, has been unsettling. Nobody feels good about losing a third of their stock portfolio in a three-week span. The good news? You can survive a bear market – if you stick to the basic survival guide that Wall Street periodically pulls from the bookcase when the bear initiates its attack on your money.

Continue Reading: USA TODAY

Why long-term investors should never sell stocks in a panic

During times of extreme volatility, many strategists say avoid panic selling.

“The adage “keep calm and carry on” might, in the end, be the best advice for investors to follow during times of extreme market volatility such as the present.

While it might seem counterintuitive to sit back and relax while stocks post swift and steep losses, for investors with longer-term time frames it typically pays to wait it out.”

Read full CNBC article here: https://www.cnbc.com/2020/03/22/why-long-term-investors-should-never-sell-stocks-in-a-panic.html

Should you really do nothing?

Re-posted from CNBC.COM

KEY POINTS
  • As the trade war between the world’s largest economies rages on, your savings are likely taking a hit.
  • The Dow Jones Industrial Average plunged more than 750 points on Monday, while the S&P 500 dropped nearly 3%.
  • Amid troubles in the market, the most common advice is to do nothing. However, it can be helpful to turn your attention to your own timeline.
GP: Roller coaster market volatility
Picture Alliance | Getty Images

As the trade war between the world’s largest economies rages on, your savings are likely taking a hit.

The Dow Jones Industrial Average plunged more than 750 points on Monday, while the S&P 500 dropped nearly 3%.

Amid troubles in the market, the most common advice is to do nothing. However, it can be helpful to turn your attention to your own financial goals and timeline.

“If you have 40 years left to invest, a bear market right now is just noise and should be ignored — in fact, often celebrated,” said Doug Bellfy, a certified financial planner at Synergy Financial Planning in South Glastonbury, Connecticut.

On the other hand, Bellfy said, “a stock market crash that starts the day after you retire can cause a permanent lifestyle impact if all your money is invested there.”

Here’s what the ups and downs of the market mean for you, depending on your age.

20s-30s:

Premium: millenials debt personal finance young woman bills
Svetkid | E+ | Getty Images

If you’re a young investor, your rate of return typically matters less than your savings rate, said James Sweeney, a CFP and founder of Switchpoint Financial Planning in Lehi, Utah.

 He provided an example: If you’re 30 with $20,000 invested, whether you earn a 10% or a 5% return will only result in a difference of around $1,000.

But, Sweeney said, “if I can save aggressively, and put an extra $5,000 toward retirement, that has a much bigger effect on my portfolio value.”

People in their 20s and 30s who are investing for retirement really are best off doing nothing as the market rages, said Alex Doll, a CFP and president of Anfield Wealth Management in Cleveland. When you put money into your 401(k) during a downturn, you’re actually taking advantage of a low-cost environment.

However, you don’t want the money you need for near-term expenses in the stock market, because it has a greater chance of losing value, said Nicholas Scheibner, a CFP at Baron Financial Group in Fair Lawn, New Jersey.

Keep the savings for, say, a home purchase within the year, in cash or CDs.

More from Invest in You:
You don’t have to be an economist to understand the Federal Reserve
Here’s what you should do with your 401(k) when markets tank
Talk money with your friends – it might just improve your finances

40s-50s:

LarsZahnerPhotography | Getty Images

The biggest mistake middle-aged investors can make is to sell at the bottom of a bear market, Sweeney said. “Most people still have 10 or more years until they retire, which is typically more than enough time to ride out a bear market,” he said.

A bear market is said to have begun when a major index such as the S&P 500 drops more than 20%.

After the 2008 downturn, when the S&P 500 plunged 56%, investment portfolios took between one and three years to recover (for asset allocations ranging from half stocks and half bonds, to 100% stocks), according to Vanguard.

Do make sure you have enough cash reserves built up to cover your upcoming expenses, including school tuition and planned vacations, said Milo Benningfield, a CFP and founding principal of Benningfield Financial Advisors in San Francisco.

“If not, consider raising cash from your portfolio now, rather than later after markets have fallen,” he said.

60s-70s:

Reza Estakhrian | Getty Images

As the stock market swings up and down, older investors should avoid complacency and tweak their portfolio to make sure they’re ready to exit the workforce, Bellfy said.

“I find that investors that are getting close to retirement do sometimes need to be coaxed to reduce risk and build cash reserves,” he said.

How much should you have in cash? At least two years’ worth of living expenses, according to Bellfy. “But more can be better if one has the ability to save up more,” he said.

That way if the bear market hits just before you retire, you won’t need to dig into your portfolio at reduced prices.

“Avoid the temptation to cash out your investments completely,” Benningfield said. “You may have another two to four decades of spending to cover.”

If you’re already in retirement:

Davids’ Adventures Photos | Moment | Getty Images

Investors who no longer receive a paycheck want to make sure they have enough of their money in cash and bonds to last them until the market heals, Sweeney said. They’ll also generally have Social Security and/or a pension to rely on.

He recommends building up between five and 10 years’ worth of these reserves. So if you estimate that you’ll need to withdraw $25,000 a year from your portfolio, you’d want to keep $125,000 to $250,000 in cash and bonds.

He said retired investors still need some growth assets such as stocks, particularly since people are living longer.

“In a bear market, pull from your bond portfolio to fund your lifestyle,” he said. “Leave your stocks alone.”

WATCH: Five strategies you should use to protect your portfolio

VIDEO01:55
5 strategies you should use to protect your portfolio

Thursday could be awesome for stocks

Re-posted from Yahoo Finance

The S&P 500 (^GSPC) a plunged a whopping 2.9% on Wednesday, booking its second-worst single-day of trading this year. But is it time to head for the hills?

Historically, major one-day selloffs in the stock market are often followed by strong one-day gains. In a new research note to clients, BMO Capital Markets’ Brian Belski warns that “successfully timing the market on a consistent basis can be an extremely difficult task and even the slightest misjudgment can have a material impact on portfolio performance.”

He demonstrates his point by considering the August 5 market selloff, which saw the S&P 500 drop 3.0% in a single day. It was the worst one-day selloff of the year (through August 13).

“Given the perception of this pullback as the beginning of the end for the bull run by many market pundits and media outlets, some of our clients we spoke to chose to sell out of their equity positions before the pain got any worse,” he noted.

But that proved to be a mistake. The very next day, the S&P 500 jumped 1.3%. In fact, three of the best days of 2019 came in the days following that August 5 plunge (stocks gained 1.9% on August 8 and 1.5% on August 13).

Stocks often rally after major selloffs.
Stocks often rally after major selloffs.

This is not just a 2019 phenomenon. Belski and many of his equity strategy peers long written about how notably weak periods are often immediately followed by notably strong periods.

Is this time different?

It’s worth noting that Wednesday’s selloff follows news that the yield curve inverted for the first time since 2005, a sign that a recession could hit the U.S. economy in the coming months.

But once again, history says we should prepare for a rally.

“After the initial drawdown, the S&P 500 can have a meaningful last gasp rally,” Bank of America Merrill Lynch’s Stephen Suttmeier observed of the inverted yield curve-triggered selloffs. “This rally has averaged 16.7% (12.4% median) with a range of 2.0% (1965) to 28.5% (1989) and lasts 6.7 months on average (2.8 median) with a range of 0.9 to 16.5 months. The 1967, 1978, 1989, and 2005 inversions saw last gasp rallies in excess of 20% on the S&P 500.”

Again, that’s just the history and the sample sizes are small. But as they say, “it’s all we have.”

Here’s What You Need to Do Now

Re-posted from Money.Com

The Dow Just Dropped 767 Points. Here’s What You Need to Do Now

By IAN SALISBURY

August 5, 2019

Stocks plunged on Monday as tensions between the U.S. and China flared. While big, sudden stock-market drops are never fun, if you’ve been smart and disciplined with your investments, there’s no reason to panic.

President Trump’s trade war escalated on Monday, when China moved to devalue its currency, making Chinese goods cheaper to foreign consumers and partially countering the effects of Trump’s tariffs. The stock market’s reaction was swift. By mid-afternoon on Monday the Dow Jones Industrial Average was down 767 points, or about 2.9%, to close at 25,718. Other indexes, tracking European and Asian stocks, were also down.

The trade news came hours after back-to-back mass shootings in the U.S. that shocked many Americans and drew reactions from across the political spectrum. While the shootings are unlikely to have immediate economic significance, they added to many Americans’ sense of foreboding.

As usual with stock market gyrations, most investors would do well to avoid reacting to Monday’s big drop. Your focus should be on the long term. But it’s worth putting what’s happening in the market into context.

Here’s what you need to know:

Why Some Investors Are Worried

President Trump won the election in 2016 in part by arguing that the U.S. needed to take a tougher stance in its trade relationship with China, the world’s second-largest economy. Despite some early signs of success, efforts to renegotiate the terms of U.S.-China trade deals stalled earlier this year. As a result, Trump recently said the U.S. would levy a tax of at least 10% on nearly all of the $540 billion worth of Chinese goods imported into the U.S.

On Monday, China, which has long tightly controlled the value of its currency — the Yuan– responded by weakening the currency versus the U.S. dollar. That means a U.S. dollar buys slightly more Chinese goods than it did before, partially offsetting the bite of the tariffs and hopefully giving the Chinese economy, which was slowing even before the trade war began, an extra boost.

While that may benefit China in the short term, however, U.S. investors saw it as a sign that the standoff between the U.S. and China is unlikely to end any time soon — and could ultimately end up hurting both nations’ economies. What’s more, like China’s, the U.S. economy has also been showing signs of weakness, making pursuing a costly trade war even riskier. After all, it was only last week that bond market jitters and soft U.S. manufacturing dataprompted the Federal Reserve to lower interest rates for the first time since the Great Recession.

Why You Shouldn’t Overreact

While worries about the U.S. economy are real, you should never read too much into a single day’s stock market moves.

For anyone who follows the stock market regularly, an 700-point drop in the Dow is eye-popping. During the height of the financial crisis, when Congress refused to back the bank bailout bill, the Dow dropped 778 points — then the largest single-day point decline in history — setting off a firestorm. But it’s worth remembering that the Dow was only slightly above 10,000 back then, meaning the decline translated into about 7% of the stock market’s total value. Today, the Dow is above 25,000 and Friday’s 767-point drop translates into a percentage-point decline of less than 3%. While 7% declines are truly remarkable, 3% declines are unusual but hardly unheard of, typically taking place a few times each year.

What’s more, while economists are indeed cautious about the U.S. economy, so far the signs are hardly dire. Unemployment, a key indicator of brewing trouble, remains historically low, while consumer confidence remains high. “The outlook for the U.S. economy remains favorable, and this action is designed to support that outlook,” said Fed Chair Jerome Powell in introducing the Fed’s rate cut last week.

Indeed, don’t forget that just last December the Dow posted its worst week in a decade, declining 1,655 points, or nearly 7% in five days. The outcome? Within a few months, investors had forgotten all about it, and the Dow reached a new record, closing above 27,000 for the first time in July.

What You Should Do
The short answer is probably nothing. While Monday’s move was jarring, no one knows where the market is headed next. What we do know is that, in the long run, stocks tend to rise — gaining about 10% a year, on average, for those who can weather the gut-wrenching volatility.

When should you do something?

If you were really sweating bullets on Monday, you should consider rethinking the balance of stocks and bonds in your portfolio. (Bonds typically rally when stocks fall, helping offset your losses.) That’s not because the outlook for stocks is any worse today than it was on Friday. It’s because the worst thing you can do as a stock market investor is panic and sell out when the stock market really is in the midst of a major downturn.

If you think you’re prone to making that mistake, it’s far better to trim your stock exposure today, with the market still relatively close to its all-time high, than later when it’s not. You can get a sense of how different mixes of stocks and bonds react to different market conditions with this chart from fund company Vanguard.

Should you really do nothing?

Re-posted from CNBC.COM

Should you really do nothing amid market volatility? It depends on whether you’re 27 or 63

KEY POINTS
As the trade war between the world’s largest economies rages on, your savings are likely taking a hit.
The Dow Jones Industrial Average plunged more than 750 points on Monday, while the S&P 500 dropped nearly 3%.
Amid troubles in the market, the most common advice is to do nothing. However, it can be helpful to turn your attention to your own timeline.
As the trade war between the world’s largest economies rages on, your savings are likely taking a hit.

The Dow Jones Industrial Average plunged more than 750 points on Monday, while the S&P 500 dropped nearly 3%.

Amid troubles in the market, the most common advice is to do nothing. However, it can be helpful to turn your attention to your own financial goals and timeline.

“If you have 40 years left to invest, a bear market right now is just noise and should be ignored — in fact, often celebrated,” said Doug Bellfy, a certified financial planner at Synergy Financial Planning in South Glastonbury, Connecticut.

On the other hand, Bellfy said, “a stock market crash that starts the day after you retire can cause a permanent lifestyle impact if all your money is invested there.”

Here’s what the ups and downs of the market mean for you, depending on your age.
20s-30s:
Happy young couple jumping into the pool while holding a bunch of balloons
If you’re a young investor, your rate of return typically matters less than your savings rate, said James Sweeney, a CFP and founder of Switchpoint Financial Planning in Lehi, Utah.

He provided an example: If you’re 30 with $20,000 invested, whether you earn a 10% or a 5% return will only result in a difference of around $1,000.

But, Sweeney said, “if I can save aggressively, and put an extra $5,000 toward retirement, that has a much bigger effect on my portfolio value.”

People in their 20s and 30s who are investing for retirement really are best off doing nothing as the market rages, said Alex Doll, a CFP and president of Anfield Wealth Management in Cleveland. When you put money into your 401(k) during a downturn, you’re actually taking advantage of a low-cost environment.

However, you don’t want the money you need for near-term expenses in the stock market, because it has a greater chance of losing value, said Nicholas Scheibner, a CFP at Baron Financial Group in Fair Lawn, New Jersey.

Keep the savings for, say, a home purchase within the year, in cash or CDs.

40s-50s:

Retired-Couple-560x373

The biggest mistake middle-aged investors can make is to sell at the bottom of a bear market, Sweeney said. “Most people still have 10 or more years until they retire, which is typically more than enough time to ride out a bear market,” he said.

A bear market is said to have begun when a major index such as the S&P 500 drops more than 20%.

After the 2008 downturn, when the S&P 500 plunged 56%, investment portfolios took between one and three years to recover (for asset allocations ranging from half stocks and half bonds, to 100% stocks), according to Vanguard.

Do make sure you have enough cash reserves built up to cover your upcoming expenses, including school tuition and planned vacations, said Milo Benningfield, a CFP and founding principal of Benningfield Financial Advisors in San Francisco.

“If not, consider raising cash from your portfolio now, rather than later after markets have fallen,” he said.

60s-70s:

Retired Couple Finances

As the stock market swings up and down, older investors should avoid complacency and tweak their portfolio to make sure they’re ready to exit the workforce, Bellfy said.

“I find that investors that are getting close to retirement do sometimes need to be coaxed to reduce risk and build cash reserves,” he said.

How much should you have in cash? At least two years’ worth of living expenses, according to Bellfy. “But more can be better if one has the ability to save up more,” he said.

That way if the bear market hits just before you retire, you won’t need to dig into your portfolio at reduced prices.

“Avoid the temptation to cash out your investments completely,” Benningfield said. “You may have another two to four decades of spending to cover.”

If you’re already in retirement:

Social Security Couple

Investors who no longer receive a paycheck want to make sure they have enough of their money in cash and bonds to last them until the market heals, Sweeney said. They’ll also generally have Social Security and/or a pension to rely on.

He recommends building up between five and 10 years’ worth of these reserves. So if you estimate that you’ll need to withdraw $25,000 a year from your portfolio, you’d want to keep $125,000 to $250,000 in cash and bonds.

He said retired investors still need some growth assets such as stocks, particularly since people are living longer.

“In a bear market, pull from your bond portfolio to fund your lifestyle,” he said. “Leave your stocks alone.”

Intl stocks just can’t compete with the U.S.

Another great article for some long term perspective ~Wayne

2019 is shaping up as yet another year where non-U.S. stocks lag the S&P 500

Should U.S. investors even try to diversify their stock portfolio internationally? Many are wondering, and it’s easy to see why: international stocks, with few exceptions, have underperformed U.S. equities for quite a few years now — and not by just a little. Over the past 10 years, for example, international equities have lagged U.S. stocks by eight percentage points annualized.

A glimmer of excitement and hope among those championing international diversification happened briefly in 2017. That’s when, for the first time in five years, international stocks beat U.S. stocks — by six percentage points, no less. But that hope was soon dashed, as U.S. stocks finished far ahead in 2018. The same is true so far in 2019.

Those in favor of international diversification now have to justify their beliefs. Gil Weinreich of Seeking Alpha recently focused one of his excellent podcasts for financial advisers on whether “investors [should] finally throw in the towel on global diversification.”

Weinreich argued that investors shouldn’t, and for the most part I agree. Yet I do think U.S. and dollar-based investors need to reduce their expectations for what international diversification can deliver.

Perhaps the strongest argument for giving international diversification the benefit of the doubt is that the past 10 years are hardly exceptional, as shown in the accompanying chart. Notice that, though the S&P 500SPX, -0.13%   is well ahead of the MSCI EAFE index 990300, +1.09%   over the most recent 10-year period, winning over a decade is hardly unique. Indeed, during the late 1990s and the early aughts the S&P 500 was far further ahead of the EAFE for trailing 10-year return.

Yet EAFE eventually came back to life. For six straight calendar years — 2007 through 2012 — this index of international equities outperformed the S&P 500.

Clearly, recent experience appears to be unique only to investors with limited memories and no sense of history. At a minimum, therefore, there is no reason in recent performance trends alone to conclude that this time is different.

That said, it is always possible this time is different — that international stocks will never come roaring back and beat the S&P 500. If that’s what you believe, you must base it on something other than these two categories’ recent relative returns.

Why, then, do I believe investors need to reduce their expectations for the benefits of international diversification? Because those benefits have been exaggerated; it’s important to be realistic so that we do not become unnecessarily disappointed and throw in the towel.

A bit of background is helpful. One of the main benefits of international diversification is that domestic and international equities have relatively low correlation to each other. That means that one is likely to be zigging when the other is zagging, and vice versa. So a portfolio divided between both asset classes should have less overall volatility than either one individually.

The problem with this argument is that the correlation between international and domestic stocks is not constant. International stocks exhibit their lowest correlation with U.S. equities when the latter is in a bull market — precisely when you want diversification the least. International stocks exhibit their highest correlation with U.S. equities when the latter is falling, which is when you do want to be invested in another asset class with a low correlation.

Consider the annual correlations between the S&P 500 and the EAFE index since 1970. In those years in which the S&P 500 rose, the correlation coefficient was 0.34 — while it has been 0.63 in years in which the S&P 500 fell.

This idiosyncrasy of international-versus-domestic correlations is not new. Academic researchers have known about it for years. It’s just that most advisers and investors were unaware of it.

This idiosyncrasy doesn’t mean that international diversification has no benefits. It does, since a 0.63 correlation is still a lot lower than 1.0. Assuming that this correlation holds in the future, and assuming that over the long term international equities produce a rate of return that is similar to that of U.S. equities, then a portfolio divided between the two categories will have better risk-adjusted performance than a portfolio that invests in U.S. stocks only.

It just may not be quite as good as you expected.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. Hulbert can be reached at mark@hulbertratings.com

The Toll of New Trade Tensions and Your Portfolio

It was hard to miss the headlines about escalating trade tensions between the U.S. and China this week—and hard not to notice the up-and-down market activity that went along with it. But what, if any, long-term impact does trade policy have on the economy and, by extension, our portfolios? The BAM ALLIANCE’S Director of Investment Strategy Kevin Grogan explores this topic in the following article, and reminds us, once again, that although it remains to be seen how the events of this latest news cycle will play out, your evidence-based financial plan is built to anticipate and withstand market risk.

 

News of an escalating trade war between the U.S. and China dominated headlines in recent days as the government imposed new tariffs on $200 billion of Chinese imports when the latest round of talks broke down. Per Bloomberg, the U.S. has set a deadline of “three to four weeks” for negotiations to produce a deal before the U.S. imposes additional tariffs. The most recent impasse follows a series of negotiations over the past 18 months. The S&P 500 is down about 3% so far this month in response to the news.

 

The Trump administration’s apparent goal with its various tariff programs is to 1) secure what it sees as a better trade balance, and/or 2) procure more advantageous trade terms by using U.S. tariffs as a tactic for compelling other countries to eventually lower their own tariffs on incoming U.S. products.

 

It is important to point out that, trade terms aside, a negative trade balance isn’t necessarily the same thing as being on the losing side of a trade relationship. Consider the following analogy: You buy (import) produce from, but don’t sell (export) produce to, your local grocer. This opens a negative “trade balance” with the store. Nevertheless, you probably don’t see yourself as somehow coming out short in a deal where the store gets your cash and you get dinner.

 

What long-term impact the Trump administration’s tariff policy will have on the economy remains to be seen. For instance, we don’t know whether even higher tariffs on even more goods imported from even more countries will be levied (or not), or how long reciprocating tariffs could be in effect. In addition, tariffs that in theory should represent only a minor drag on the economy may have an outsized influence, depending on how consumers perceive and respond to them. What we do know is that tariffs raise prices, effectively amounting to a tax on consumers. There is evidence that the tariffs already in place have had an impact on consumers since they went into effect. That is why, in the end, no one “wins” trade wars, making them a detrimental prospect for all involved. We are well aware that such events, however unpredictable, can and will happen. That’s why we build long-term, evidence-based financial plans to anticipate and incorporate market risks.

 

Before considering any drastic action with your portfolio, it may be helpful to recall that the stock market is forward-looking, so it already has incorporated its best guesses for how the current tariff situation will (and a lengthy trade war would) play out. And this information already is reflected in prices. Furthermore, we simply do not know how the game will end. If the Trump administration’s strategy to confront U.S. trade partners works, and all tariffs come down, it would be a huge win for the world, not just domestically. If the strategy precipitates an even bigger, all-out, long-term trade war, it likely would lead to lower economic growth around the world, with the consolation prize being that the U.S. would likely be affected the least.

 

In a trade war, relatively speaking, the U.S. tends to weather the storm better because trade is a much smaller percentage of U.S. gross national product than it is for most countries. This likely explains much of U.S. stocks’ outperformance over the past couple years. In the event of a trade war, small-cap stocks tend to do better than large-cap stocks because, in general, they are exposed to less global trade. Again, this likely helps to explain small-cap stocks’ outperformance since the beginning of 2018. Moreover, the dollar tends to strengthen as investors flee to safety and liquidity.

 

Conversely, international stocks tend to do worse in a trade war, and emerging market stocks tend to do the worst of all because their economies often are more reliant on global trade and their currencies take a hit from investors’ flight to safety. This can be a double whammy for foreign economies, as much of their debt tends to be in dollars (which are appreciating relative to other currencies, making debt financing more expensive). That is exactly what has happened as the risk of an extended trade war has increased.

 

If the market anticipates that the odds of a full-blown, long-term trade war are rising, investors likely will see more of this type of action. When the odds of a bad outcome seem to decrease, likely the reverse will occur. Indeed, an increasing risk of continued trade conflict likely explains equities’ relative performance (that is, it helps explain why U.S. stocks, particularly U.S. small-cap stocks, are outperforming).

 

In virtually all cases, economic or geopolitical news is not value-relevant information, unless you have a copy of tomorrow’s newspaper. The prudent course of action remains to adhere to your comprehensive financial plan, ignoring speculation in the financial media. The only time you should alter your plan is when your assumptions about your ability, willingness or need to take risk have changed.

 

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