Look for the bare necessities
The simple bare necessities
Forget about your worries and your strife
I mean the bare necessities
That's why a bear can rest at ease
With just the bare necessities of life
There’s a lot going on in the world so far in 2022.
Russia’s invasion of Ukraine, the price of everything increasing due to supply chain issues and inflation, rising interest rates on your debt, all against a backdrop of what feels like continually increasing political polarization. This is all stressful stuff!
You’re not alone either in your worry either. All of these examples carry major investment implications and markets have been struggling to reflect this new reality.
Below we’ll talk about how this pain, could actually represent an opportunity for patient investors to capture long-term gain.
First let’s define some terms.
Market Correction: In investing, a correction is usually defined as a decline of 10% or more in the price of a security from its most recent peak.
Bear Market: A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.
Where Are We Today?
The below table shows that year-to-date (YTD) the S&P 500 (aka the 500 largest public US companies) is in a bear market. While the TSX is just shy of correction territory, this is mainly due to the large weighting of the Energy and Materials sectors. The below tables highlight the performance of many underlying sectors has been worse and that there has been almost nowhere to hide.
Meanwhile, rising interest rates (used to fight inflation) have hurt fixed income investors. This means that both sides of a balanced portfolio have been hit this year.
Data as of June 20, 2022. Source: CIO Office. Data via Refinitiv.
Where Do We Go from Here?
Investing well really comes down to 2 things.
Making smarter decisions. This is done by increasing the odds and/or payoff of being right.
Sticking to your plan for a very long period of time. Think “decades” not “months” or “weeks” (and especially not “hours”). Investing is the anti-casino: the longer you play, the more likely you are to win.
With that in mind, here’s a look at past bear markets alongside their subsequent returns.
Source: CIO Office. Data via Refinitiv, Ibbotson.
Could markets fall further from here? It’s certainly possible; each bear market is unique.
However, making smarter decisions means getting the odds in your favour, not perfectly timing the bottom. You don’t want to be on the sidelines during historically strong recoveries!
No Pain, No Gain
While there’s disagreement on the exact number, the long-term average stock market return is somewhere between 8-10%. Averages are funny though because they hide dispersion. Imagine having 1 foot in a bucket of ice water and 1 in a bucket of very hot water. An average says you’re comfortable.
Given the large downswings in bear markets, mathematically there must be even stronger upswings to achieve that 8-10% long-term average. This is explained by the recovery “gain” being more powerful than the bear market “pain”.
This table illustrates just how strong the post-COVID recovery was. Even if there was a 40% correction (something only seen twice since 1986), the TSX would only be brought back to March 2020 levels.
Some Historical Context
There’s no denying we have been living through historic times. While for younger investors it might all seem very frightening, famous investor Ray Dalio has some excellent advice:
While the world feels like a scary place today, it’s always been that way. The below chart shows that post-Great Financial Crisis, there has been a lot of ground covered! There were quite a few scares, yet the stock market continued chugging along and compounding wealth for investors.
Source: CIO Office. Data via Refinitiv.
Still not convinced? Let’s look back a century.
Source: CIO Office. Data via Robert J. Shiller.
What To Do
Often the best advice is the simplest and that’s true here. Get Started!
Here are 2 recent posts we had on how to go about doing that.
As always, if you would like to discuss this further please get in touch with someone on our team and we’re more than happy to chat.