We often make the first judgement on things without fully understanding the context.
That's a very common thing that most of us are guilty of. Our experiences have provided us with certain preconceived notions and we use them to pass judgements on many things we come across in lighting speeds.
This applies to how we judge our portfolio and financial markets too.
When we are in a bull market, we tend to think that the bull markets will last forever. When we are in a bear market, we believe it will last forever too.
This is what's happening now.
The market has been on a downward trend for the whole of 2022 so far. The S&P 500 saw a decline of -16% YTD while the NASDAQ has already lost a quarter of its value this year.
As we see the value of our portfolio drops on a daily basis, we tend to second guess our investment choices and might even consider selling our positions. More often than not, you will come across suggestions from a friend or colleague to sell now and buy later. This is the best way to protect your capital and make gains, he or she might claim.
That's a whole topic on why timing the market isn't the best thing anyone of us could do and I think Of Dollars and Data cover it very well in a recent blogpost so you might like to check it out.
The key thing to cover here is not about timing the market. Instead it's about not being too quick to judge the performance of your portfolio during dismal periods like this and end up making decisions that you may regret. Bear markets like now are common and part of the whole investment scheme.
Here are some charts.
Bear markets often happen during periods of recessions. The above chart shows the performance of S&P 500 in the previous recessions. What's interesting here is that the average duration of the recession is 10 months. That's much shorter than most bull periods. This is also the reason why investing in the stock indices over a long period always pay off.
If you are wondering how the stock market performs after every recession, here's another chart.
Look at the sea of green.
At the 3-year mark after every recession, S&P 500 is back in the green.
This is also the reason why tinkering with your portfolio or selling your positions in a bear market aren't the best things to do if you are playing the long game.
Some of you might be thinking that it's silly to just want your portfolio to be in the green. After all, who wants to invest in the S&P 500 during the doctor bubble in 2001 and only achieve an 8% gain 3 years after the recession.
Well, the fact is that the actual return can be a lot higher than 8% if you keep buying throughout the bear markets. Regular periodic purchases or rather dollar cost averaging during these periods typically pay off really well for your portfolio as you bring down the average purchase prices of your equities and hence this usually results in a higher return than what you are seeing on the charts above.
If you are more than 10 years away from your retirement, such bear markets might be exactly what you are wishing for. Having bad market conditions early in your investment journey is always much better than having bad market conditions nearing your retirement due to the sequence of returns risks. The current bear markets provide the best conditions for you to accumulate your assets in preparation of any future bull run. This of course works best if you still have a significant runway till your retirement. You may check out my earlier post here about this.
My current portfolio has also taken a hit due to the current market conditions.
Here's all the drawdown periods for my portfolio.
(Source: Portfolio Visualizer)
As you could see, this is one of the biggest drawdowns for my portfolio based on backtesting data in recent years. In fact, it should be the biggest drawdown if you include the performance in May so far. Nonetheless, the portfolio always recovers at the end of the day and I have no doubts that my portfolio will recover too.
Before that happens, I will like to ensure that I achieve a good CAGR over the next few years by continuing to do my DCA purchases during this period.
I will certainly not be too quick to judge my own portfolio choices and I hope you won't too (provided you either have a diversified portfolio or invest in market indices).
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