You need to have a plan.
What do I mean?
My job for the last 30 years has been to help my clients formulate a lifelong investment plan based on historical returns that will be utilized within a well-crafted financial plan.
The plan works fine for our clients when the markets deliver positive returns. But when the markets decline (as they are inclined to do every year), clients too often default to the assumption that the plan is no longer working and, therefore, rendered useless and should be immediately changed or, worse yet, abandoned.
In other words, every investor has a plan until they get punched in the face with a bear market.
It’s too easy to get swept up in the apocalypse du jour of the minute and jump on the “this time is different" bandwagon. The mainstream media, friends, co-workers, family members, and neighbors are all too happy to give you a helping hand to lift you up on that bandwagon.
Fear loves company.
Completely ignoring for the moment, the fact that since the end of WWII, the average compound annual return of the S&P 500 has been around 10%, which INCLUDESan average 30% drawdown on average of about every five years in the interim.
Given that bear markets are part of the investing landscape and are necessary, healthy, and crucial pieces needed to extend bull market gains further, the question begs:
So, what’s the plan when things go south with our investments?
First of all, let's put all of our cards on the table and acknowledge that the next bear market will be different from its predecessors because the economic/financial/geopolitical details are not likely to be anything we've ever experienced. It's a "for the first time in history” type of thing.
But that’s the way it always happens.
The reasons bear markets happen are ALWAYS going to be different; however, the effects on the equity markets will be all too familiar.
When the equity markets temporarily turn to mush, you can bet that the fundamental strength and resilience of the great American companies expressed in their seemingly limitless capacity to innovate, increase their earnings, and raise dividends will once again shine through.
It's easy to forget that in the last quarter century, S&P 500 companies went from earning $51.68 and paying $16.69 in dividends to now, according to consensus, going to be around $240 and $76, respectively.
WOW! Please go back and read that paragraph again.
Not to mention, investors have had to weather four rip-your-face-off market drops over that span. (Does anybody remember 2008-2009 or COVID?)
If for no other reason, your plan should be simple: be the investor you're supposed to be – patient, disciplined, long-term owners of consistently successful companies immune from succumbing to the fear and pessimism that disconnect you from the enduring value of those companies you own.
Did you really think that during the panic-driven COVID years, when the S&P 500 dropped 34% in 33 days, Apple, Netflix, Microsoft, Walmart, JP Morgan, and Caterpillar completely lost their ability to make money, despite their underlying stock prices that suddenly dropped by a third? You didn't really believe that, right?
In times like that, even the most stoic, logical-thinking long-term investor loses their ability to stick with the plan.
Maybe when it all hits the fan, the answer to the fundamental question of “What’s the plan?" should be to plan on sticking to the plan.
I don't know how 2025 will play out for investors; I only know that if a significant decline should befall investors, it might be helpful to stand firm and assert with fierce conviction that "We planned for this."
Stay the course, my friends.