Bear Market Therapy
Bear Market Therapy
By: Brian A. Magnan CFP®, AIF®, CEPA®
Director – Magnan Family Wealth Management
If you can read this, you have lived through a bear market. More likely, you have experienced multiple bear markets with your investments. Either way - each bear market we go through, the general public has the same emotional reaction - surprise, then panic. I have found by talking through the specifics of these price declines with folks, they have a higher likelihood of success in avoiding a wealth-destroying mistake.
What is a Bear Market? Our society has defined it as a 20% decline in price.
There are many reasons to pay an advisor for assistance with your financial life. However, after 30 years of providing financial counsel, I have found the greatest value any advisor can provide is guidance with bear markets.
In that vein, let’s jump in. I would like to make this a bit of an interactive session. You may want to grab a pencil and paper, or maybe you run the calculations on your phone or tablet. Either way, the exercise works best if it is written down.
1. Go online to your investments (or grab your paper statements). Add up the dollars you have invested in equities. (If you don’t know which investments are equities, we can assist you). Make sure to include all of your accounts - IRAs, 401ks, Annuities, Roth IRAs, Life insurance, trust, joint, etc. Please make your calculation approximate. Feel free to round up or down to whatever makes the math easier for you. You won’t be turning this assignment in - so no pressure.
A. Equity Portfolio Amount _______________ (ex. $1,000,000)
2. Take a glance at our favorite chart below. There are 18 declines in price of 20% or more since 1946. Choose any one of them.
3. Try to imagine yourself living your current life during the peak of the bear market you choose. The more specific you can be, the better. Think about the top songs of the day, political climate, or fashion culture. Immerse yourself in the process. (ie. Currently, I am 54 years old, married with 3 children and a dog. I choose the bear market starting in 1973. Therefore, I am wearing Converse All-Stars and my hair is styled in a comb-over. Tiffany, my wife, has long straight hair parted down the middle while walking around in chunky platforms. Our kids are on their bikes terrorizing the neighborhood and our dog.)
4. Now that you have properly imagined yourself in that culture, multiply the equity portfolio amount by the percent decline in price for that bear market. This is the temporary decline in price amount.
B. Percent Decline in Price of your Bear Market _______________
(ex. 50%)
C. Temporary Decline in Price Amount = A * B _______________
(ex. $1,000,000 * 50% = $500,000)
5. Then subtract the temporary decline in price amount from the equity portfolio amount and this is the dollar amount of your portfolio at the bottom of this bear market cycle.
D. Total Equity Portfolio Value at Bottom of Bear Market = A - C _______________
(ex. $1,000,000 - $500,000 = $500,000)
STOP!
How do you feel? Seeing your equity portfolio drop in price is hard. Always has been and always will be.
Here is the good news. The S&P 500 has recovered from every decline it has ever experienced! Go back to the chart. Please note the general trend of higher peaks and higher troughs of each Bear Market.
Of course, anything is possible. We could have another ice age, alien invasion, or deadly virus. However, history tells us the world never stops turning, the companies we own (equities) figure out how to successfully navigate the new challenges, and progress resumes.
We do have a process for surviving the next bear market. It is a 360-degree approach - encompassing everything financial in your life. The point of this Bear Market Therapy is to minimize or even eliminate your surprise of the next big temporary decline in prices, thus preventing you from panicking into a wealth-destroying mistake.
P.S. We have already done this math for you. It is located on the front page of your agenda for the latest annual update meeting. 😊
Index return information is provided for illustrative purposes only. Index returns do not represent investment returns or the results of actual trading nor are they forecasts of expected gains or losses a portfolio might experience. Index returns reflect general market results, assume the reinvestment of dividends and other distributions, and do not reflect the deduction of fees, expenses or taxes applicable to an actual investment. index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
S&P 500 Index is a capitalization-weighted index calculated on a total return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Magnan Family Wealth Management is a separate entity from WFAFN.
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