About the intelligent investor
The weekly column by The Intelligent Investor by Jason Zweig has been published in the Wall Street Journal for about a decade and is published exclusively in Globes. According to Zweig: “My goal is to help you distinguish between good advice and what only sounds good.”
About Jason Zweig
One of The Wall Street Journal’s top journalists. Author of the book “Your Money and Your Brain: How the Neuroscience Can Help You Get Rich,” and the editor of the updated best-selling version of “The Wise Investor,” which Warren Buffett described as “the best investment book ever written.”
What we see today is not a bear market, these are two bear markets. One threatens younger investors who are still in their savings years; The other harms those who have retired or are about to retire.
For those who are still in their good income years, this bear market is likely to be bullish in the long run, as it is painful in the short run. For older investors, this deterioration could be devastating.
When the Federal Reserve raised its interest rate by 0.75% last week, and inflation soared to almost 9%, US stocks fell 22% this year and bonds fell 11%. Rehabilitation may take longer than what is left for some of the older investors.
How you will get out of the current situation depends on how far your horizon is, but more importantly – what will be your reaction. It is human to feel that you have to sell something, everything, in this moment before the rest of your wealth crashes to pieces. Humans also freeze, paralyzed by the fear that any action you take will only make a worse situation worse.
There are some brave investors who even see this decline as an opportunity to buy more properties at lower prices. Others are finally happy to earn good on cash after more than a decade of zero returns. And it is important to remember that American stocks, even after the falls this year, have still earned almost 13% a year in the last decade.
For almost everyone else, the question of whether or not to buy or sell a particular investment right now will change your future capital less than some significant behavioral changes that if adopted will keep you on the right path.
One thing that helps whenever markets start to worry is to check historical precedents: how much can things deteriorate?
In this case, what investors are probably most likely to fear is a rebroadcast of the stagflation that prevailed between 1966 and 1982, when economic growth was moderate, inflation was double-digit for many years, and stocks went nowhere.
On February 9, 1966, the S&P 500 closed at a record high of 94.06 points. More than 16 years later, on August 12, 1982, the index stood at 102.42 points. Corporate profits, after calculating inflation, then shrank by 15%, according to data provided by Harvard economist Robert Schiller.
Indeed, equities yielded generous dividends, which reached almost 6% by the end of this period, but inflation swallowed it all up.
That period was so bad that it made the private investor a rare breed.
An “autopilot” in investments forces discipline on you
In 1979, Business Week magazine reported on the “death of the securities,” and for good reason.
In 1970, according to a survey of households conducted by the Federal Reserve, 25% of families invested in stocks; By 1983, only 19% were still invested that way. Between 1970 and 1981, total assets invested in equity mutual funds shrank from $ 45 billion to $ 41 billion, according to the Investment Company Institute.
The “worst case” scripts will not be worse than this. And while many investors simply gave up in those difficult years, what did those who stood the test of time achieve?
It is difficult to determine with certainty because automated investment plans, which allow investors to purchase stocks at regular intervals over a long period of time, were not widely used in those days.
But if it were possible to put $ 100 a month on U.S. stocks in each of the 199 months from February 1966 to the end of August 1982, then $ 19,900 in cumulative investments would have become $ 18,520 after calculating inflation, according to Morningstar.
By 1982, the $ 19,900 purchasing power in 1966 had shrunk to about $ 11,000, according to Nick Magwili, a senior executive at Ritholtz Wealth Management in New York and author of the book Just Keep Buying, which deals with automated investment strategies.
While investing through “autopilot” can not guarantee a positive outcome, it does enforce disciplined behavior.
“If stocks were socks, a 20% drop would be seen as a ‘sale'”
It is more likely that the investors who will flee from bear market are the ones who make all their investment in Mecca. Those who invest in a systematic and informed way are less likely to be afraid of buying at the wrong moment, which makes it easier for them to stay on track.
Adherence to the plan is especially important for young investors, who have a distant horizon. An investment plan can help them treat market failures not as a disaster but as an opportunity.
Warren Buffett’s famous saying is that investors should think of stocks as burgers. “If you like burgers, you will want to encourage a situation where their price goes down, does not go up – and the younger you are, the more future meals you have to eat,” he explains the rationale.
Similarly, “Only those who intend to sell securities in the near future should rejoice that stock prices are rising,” Buffett wrote in 1997. “Those who intend to buy should much prefer that prices fall.”
I like to say that the problem with stocks (STOCKS) is that they contain the letter T. If they were called SOCKS, people would refer to a 20% drop not as a widespread liquidation sale (SELLLOFS) but as a SALE price.
Not how much you have, but how much income it can generate
When the price of socks (SOCKS) is reduced by 20%, people are not in a hurry to get rid of the socks they already have, but check in the sock drawer if they need to buy more. Young investors should treat stocks the same way.
Of course, stocks are still not cheap in historical terms. But young people looking to build capital over a long period of time should be much happier to buy shares after the 20% drop this year, than the 114% rise it was before.
One bright spot – for younger and older investors alike, is that yields on income-producing assets are rising.
“Throughout history, the way most people have thought about wealth has been not how much you have but how much income it can generate,” said James White, CEO of Elm Partners Management of Philadelphia.
As interest rates climbed, so did real yields on long-term inflation-protected treasury bonds (TIPS), reaching 1% this year. This calculation tracks what these securities bring to investors beyond expected inflation. At the beginning of 2022, the figure was minus 0.43%.
Thus, White says, a $ 1 million investment in TIPS can generate $ 10,000 in annual revenue (after calculating inflation) and virtually risk-free. This is when, only last April, the million dollars invested in TIPS would not bring in anything, after calculating inflation.
For adults: “Retire slowly” and spend a little
Investors who have already retired or are about to retire should think of money as “stored energy that allows them to do what they want for the rest of their lives,” said financial planner Alan Roth of Wealth Logic in Colorado, “and actually defend against the possibility that the money will run out.”
When the bag is in decline, it may be necessary to take action, perhaps even sacrifice a little and postpone gratifications.
First, Roth suggests, “retire slowly,” that is, consider taking a part-time job at the beginning of retirement. This will reduce the amount of money you may be required to withdraw from your investments when they are in decline. In his opinion, it is also worth delaying the start of receiving Social Security payments until the age of 70.
“Think of them as a guaranteed annual payment for life and adjusted for inflation.” The administration increases the amounts it pays in response to inflation each year, and raises the final payments to anyone who delays the withdrawal of their first Social Security check. So deferring utilization of the benefit ensures that payments will be higher, especially when inflation rises.
The future payment will be 6% or 8% higher, after inflation, for each year you delay, estimates Mike Piper, an accountant from St. Louis who runs OpenSocialSecurity.com, a site that helps people determine the optimal age for them to sign up for welfare payments.
In the bear market, it is essential to spend less money, as financing a lifestyle by selling properties whose price has plummeted, can be painful.
Maria Bruno, director of financial planning research at Vanguard Group, points out that “it is possible to be more flexible with expenses incurred early in retirement,” for example unavoidable expenses such as medical bills that are expected to be discounted.
And when the financial markets bounce back, she says, it is possible to “adjust spending to the circumstances,” and pull a little more money from investment portfolios as their value recovers.
Ultimately, the question of whether the market will recover quickly or slowly, depends on the bear. But how you react – it depends only on you.