As it pertains to the financial markets, 2022 reminds us of a few words of wisdom that many of us may have learned from our parents, which is that it is mostly only farmers that wake up and hope for rain. However, as they are keenly aware, there is no growth without it. Our advice to investors is to pray for pullbacks (rain) because without them (it) there will be limited growth and that without short-term risk there will be no long-term reward. However, this doesn’t make times like this any easier to stomach as most of us fear the future, fear that it is “different” this time. To cope, we suggest the following.
Keep in mind that these are nerve wracking times, but not unlike other periods in history and that these too shall pass. Try not to focus on the day-to-day fluctuations in the market as fifty percent of the days the stock market declines. However, if you stretch your time horizon out to one, three, five and ten periods, the chance of the market being higher increases to 73%, 83%, 87% and 94%, not bad odds considering the alternatives.
Historically, Mid-Term election years can begin in a rocky fashion as according to statistics gathered by U.S. Bank and published on March 4, 2022, the average return of the S&P 500 during the year of the midterm through October 31 was 0.3%. During non-midterm years the rate of return averaged 10.7%. Furthermore, from November 1 of the midterm year through October 31 of the following year the S&P 500 rose by an average of 16.3%. As an aside, please note that during each of the 16 periods following the midterms noted above, the S&P 500 was always higher.
We are pawns for the media as headlines are meant to prompt you to watch or listen, to prompt you to act which many times adversely impacts your performance as it triggers an emotional trade, not one that is well thought out. Remember two things – shark week airs during the summer months for a reason and that neither hope nor panic are effective strategies during times of stress.
Baseball fans know that batters get only three strikes. If you fail to put the ball in play, you are out. Investing does not work that way. There are no balls or strikes. Take as many pitches as you want or in financial parlance wait until stocks are a screaming buy. No need to hurry.
Work incrementally. If the day-to-day market volatility is causing you agita raise ten to fifteen percent cash. As with life, when investing it is rarely beneficial to go either all in or all out. This may help you feel more at peace with the volatility and yet allow you to still participate in any recovery. Fear aka self-preservation is a greater motivator than greed which is why market bottoms quite often occur during times of extreme bearish sentiment, a place where precisely where we currently reside. However, according to the American Association of Individual Investors (AAII), “historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment.” More succinctly, buy when others are fearful and sell when others get greedy.
Consider rebalancing your portfolio. If you intended to have 60% of your portfolio in equities with the balance in fixed income and cash, after the market decline, now may be a good time to make certain that your intended allocation is still intact.
Finally, in our opinion, unlike recent corrections/bear markets this recovery will be a process shaped like a “U” rather than an event or a “V.” With this in mind it will most likely pay to purchase after pullbacks rather than rallies. Mostly, be patient.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
