When following the markets, it is helpful to remember that a 2% daily fluctuation in value for the Dow Jones Industrial Average is considered perfectly normal. When the Dow was at 5000, 2% was 100 points, but when the Dow is at 27,000, 2% is 540 points. The media doesn’t tell you that the Dow was down 2% due to normal fluctuation. They tell you, “The Dow plunged 540 points today! Have you checked your 401(k)?!” It is also helpful to look at the performance of stock funds over the last 20 years. Most stock mutual funds had 7 good years and 3 bad years during each of the last two decades: 1999 – 2008 and 2009 – 2018. Unfortunately, there is no way to know which three will be the bad years.
No one has ever been able to predict the ups and downs of the U.S. stock market, so there is simply no way to consistently time the markets. The most recent significant market downturn occurred at the end of last year from 9-20-18 to 12-24-18 when the returns on the S&P 500 were down 19.8%. At Financial Professionals, Inc. we attempt to build portfolios that will help cushion the effects of market downturns. In our FPI Model portfolios we pair aggressive stock funds with conservative stock funds to try and cushion drops in the market.
To further help protect against market downturns, we recommend that clients consider investing a portion of their funds into fixed income or bond funds. Bond funds tend to remain stable or go up when the stock market is dropping. Because most bond funds remain relatively stable during a stock market drop, it is best to take any needed funds from the fixed income sector of your portfolio. This allows you to access funds without having to sell stocks while they are down. Although we can’t guarantee it in the future, there has never been a U.S. stock market downturn that didn’t recover from the drop and go higher. If you don’t have to sell the stock while it is down, you won’t have to realize the loss. Many of our investors keep three to six years, or more, of their income needs in bonds just for that purpose.
These are just a few of the ways we prepare for the downturns that will surely come. We have other options as well, so don’t hesitate to call if you want more information on these various strategies.
Sources: Wall Street Journal, Yahoo Finance, U.S. Bureau of Labor Statistics, American Funds/ Capital Group Resource Guide, Bloomberg Index Services Limited.
DISCLOSURE: Diversification and asset allocation strategies do not assure profit or protect against loss. Indices mentioned are unmanaged and cannot be invested into directly. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.