How to Prepare for a Major Stock Market Decline

Greetings!

“Are you prepared for a 50% market decline?”

Admittedly, it’s not a fun question to ponder. In fact, my job is a lot easier just avoiding this question. When I show the great average historical returns of the markets, that’s easy to get clients excited about – earning 10% on an average annual basis.

But we all know nothing goes up in a straight line.

We know that based on history a 50% decline has happened on average every 20 years, which means you are likely to experience this at least 4-5 times in your lifetime. As I mentioned last week, if you are in your 50s, you’ve already lived through 3 of these! Yet everytime it happens, it seems to catch us off guard.

If we have learned anything from the last few years, it’s that in the short run anything is possible. Events that previously might have been unthinkable, or extreme outliers, seem to have become the norm over these last few years.

- Covid pandemic – hundred-year global health crisis - S&P 500 declines by 1/3 in 1 month - Despite the pandemic picking up steam, the S&P was propelled back to it’s previous high in as little as 5 months (who could’ve guessed that?) - 19% contraction in US GDP, a recession that began and ended in 3 months - 40-year explosion in inflation - Fastest and sharpest fed interest rate spike ever - 25% market decline in 10 months in 2022 - Russia invade Ukraine - The list goes on

Despite everything I just listed, had you invested on January 1st 2020 before all of this happened, the S&P 500 on that date was at 3225.

As of the close of business day March 4th, 2023 it is at 4061.

An increase of 25%.

Now you tell me, if you were sitting there on January 1st 2020 with a crystal ball knowing what would happen over the next few years, how many of you would have taken the bet the S&P 500 would have increased by 25% over this timeframe? Probably not one.

When we are constantly bombarded with bad news, coupled with a large market decline, we are tempted to get out now before it gets worse.

Though this is the exact opposite of what all of history and logic suggests.

Here is what I suggest:

Have you gone through the exercise of what you will do in the event of the next 50% decline? It is absolutely critical that you have a plan in place PRIOR to it happening.

The question might have popped into your head “So are you forecasting a 50% decline soon?”

We never forecast anything, we plan and prepare for everything.

The question isn’t “Is a decline coming?”

The question is “If such a decline were to happen, are we totally prepared for it?” The thought might have also popped into your head “What a depressing newsletter, you’re usually more positive, where is the good news?”

I am glad you asked!

Going back through the 3 major bear markets over the last 50 years:

Jan 1973 – Oct 1974: 48% decline Mar 2000 – Oct 2002: 49% decline Oct 2007 – Mar 2009: $57% decline

The good news…..

S&P 500 12/31/1972: 118 12/31/2022: 3840

Even as the market endured these 3 crises, the great companies found ways to grow and prosper over those 50 years by a multiple of 35x and an average annual return of about 10%, despite cutting in half 3 separate times!

No one could have timed these. The only way to be sure of achieving the returns of the great companies is to ride out their often significant, but always temporary declines.

Thank you so much for reading and being a client of ours.