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Prepare to Succeed in a Bear Market

Wealth mindset Risk Investments

It’s quite simple: by failing to prepare, you are preparing to fail.

Right now, we’re receiving many press requests asking variations of the same question: what should people do now? How should they react to the bear market, to a decline in income, or losing a job? If you decide to go on a 3-mile walk outside and it starts pouring rain at mile 1.5—it’s too late to go home for an umbrella. You’re soaked!

Unfortunately, much of the general public is responding to the bear market in a reactive manner because they were not proactive. They’re stuck in the rain without an umbrella.

Financial planning pays off!

Long term investors know the key to success is having a plan, and sticking to it. At Halpern Financial, we help you design that plan and integrate your portfolio with the plan. Above all, we take a disciplined approach.

We know that bear markets are going to occur—we just don’t know the exact timing in advance. Since 1926, we have experienced 24 bear markets, about one every 4 years. Bear markets that occur during a recession occur about every 8 years. With the most recent bear market, the numbers are closer to 3.5 and 7.5. It is not something anyone likes to experience, but we can perform regular maintenance to stack the odds in our favor. We have a plan of action for dealing with problems when they do occur.

Markets suffered double digit intra-year declines in 22 of the last 40 years, yet still ended those years with positive returns 75% of the time. Volatility is natural and provides ample opportunities to enhance your portfolio. We have been through bear markets before, and we prepare for them during the good times.

A major part of our “portfolio maintenance” plan is rebalancing. Each of our clients’ portfolios are customized to the investor’s needs.  Those needs do not change, but market pricing clearly does (as illustrated above). Rebalancing back to the intended asset class allocations prevents undue risk exposure while amplifying your ability to perform well.

Likewise, in down markets we rebalance too. We harvest tax losses where appropriate, going through each share lot of each holding within each asset class of the portfolio with a fine-toothed comb. (It’s an intensive process, but well worth it!) We reinvest the proceeds in the portfolio according to an investor’s investment objective in a very focused manner.  We search for value in a way that complements the existing portfolio holdings, while paying attention to the current economic and market climate.

Follow the Money!

Most financial news focuses on what traders say—otherwise it would be very boring! (“Follow your disciplined plan and focus on the long term,” doesn’t make a very exciting headline, even though it is the right thing to do.) Right now is the worst possible time to focus on reactionary sound bites. Remember, most financial news is about trading. Traders are going to get burned focusing on what stocks just did—while investors who focus on the long term, and take advantage of opportunities in their long-term best interest, will succeed.

Part of our portfolio approach is to concentrate on where the money is going—not where it just was.

It’s important not to shy away from riskier assets like equities during a bear market. Think about the products that have been out of stock for weeks—toilet paper, cleaning products, and basic home goods. The second-quarter earnings of companies like Johnson and Johnson are going to be far healthier than a company like Carnival Cruise Lines. Cash-healthy, low-volatility companies with strong balance sheets typically weather recessions very well.

Innovations in technology, especially 5G technology, have not gotten much attention lately, given more pressing news about the virus—but rest assured, innovation has not stopped. In fact, this crisis will bring many new innovations. The revolution we are seeing in distance-based learning and mobile capabilities is going to affect our lives in a positive way for the long term. And remember—stocks are inherently forward-looking.

Healthcare and biotech companies, of course, are extremely busy right now. It is a stressful time for our healthcare providers. But a massive amount of investment has been directed into this space and regulations have been loosened, making this asset class attractive for long-term investors.

Remember—we chose this bear market. We determined to focus on the greater good of public health versus short-term economic health. 2008 was not a voluntary choice—it was a systemic failure of our banking system. This is a voluntary choice to help each other—and we learned important lessons during the financial crisis that are already helping us now.  

All of this doesn’t make it any less painful…but it is hugely different from a systemic financial failure. A quicker recovery is more probable when the economic disruption is voluntary and the fiscal and economic stimulus is massive!  When the world bands together to fight a common enemy, innovation and good will come out of it.

As Thomas Edison said, “Good fortune is what happens when opportunity meets with planning.” A long term view enables investors to see the big picture, and address areas of both weakness and opportunity without fear.

 


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