February 14, 2020
One of the more popular questions I am asked by audiences is for advice concerning the direction of the stock market. There is no doubt that the bullish 10-year run of the stock market has many consumers feeling confident. With over 70% of the U.S. economy being consumer driven, the service-based industries are holding their economic breath that the strong stock market continues.
Are stocks a good investment?
If one goes back to 1901, the stock market has shown positive returns 74% of the time, or for 87 years of the past 118. On the downside, the Dow Jones Industrial Average has shown negative returns 26% of the time or for 31 years during this period. Annual average returns have been north of 11%, which is nearly triple the inflation rate.
Let's focus on the downturns or correction cycles since 1945 or after World War II. “Baby bear” markets, or 5% to 10% corrections, have occurred 40 times. It is interesting that the average time to recovery is three months with a “baby bear” market.
Next, the “mini bear” markets, or 10% to 20% corrections, have occurred 14 times with a seven-month average time to recovery. One will notice that the time to recover almost doubles with a “mini bear” market.
Now, let's move to the “mama bear” market. A 20% to 30% decline in the stock market really gets an investor’s attention. This type of situation has occurred five times since 1945 with a 25-month recovery, or a little over two years.
The big, ugly correction, or the “grizzly bear” market, is the one that everyone fears. This is a 30% to 60% market correction and has also occurred five times since 1945. However, the average time to market recovery is a little over four years or 49 months. When the “grizzly bear” market occurs, it is devastating to people nearing or in retirement. A steep market correction reduces the value of equities, which dissolves the retirement accounts much quicker.
Perspectives on the stock market
● If one is nearing retirement, it is recommended to maintain cash reserves equal to four years of living needs. This liquidity reserve enables you the flexibility to not draw from your stocks or mutual funds in a down market. Remember, volatility in the stock market does not result in a financial loss unless you sell your investment.
● Invest in well-managed companies with strong core values that are competitive in the U.S. and global marketplace.
● On a side note, the time to recover after the Great Depression was nearly 25 years. This lengthy recovery period is why many of your grandparents and great-grandparents were leery of the stock market.
● After peaking in the high 30,000s in 1989, the Japanese stock market has never fully recovered. Sometimes investments just do not recover!
Stocks, like land, can be a good method for agriculture producers to diversify their investments. In the long run, the average returns in the stock market outpace inflation. However, just like commodity prices, the stock market can experience volatility and sometimes require a patient investor.