Episode: 05-24-2022 | Learn About Bear Markets

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Importance of Investment Managing And Financial Planning Combined

Allison Dubreuil, Wealthway Financial Advisors 

Tonight on the show, we want to talk about investing, we usually focus more heavily on financial planning topics because we think that’s actually what’s most valuable for people because that helps them answer life’s big questions. You know, am I saving enough? When can I retire? Can I buy the beach house? All those good things are financial planning questions, but the engine of a financial plan is the investment portfolio. So investment management, and investing is a big piece of the financial plan. And we want to address a little bit about our investment philosophy and give you some fun facts. I’m going to say fun even though most people won’t agree that it’s fun. Fun facts about bear markets, since we’re dancing along the line of a bear market right now.

Kevin Zywna, Wealthway Financial Advisors Right? We don’t do one without the other at Wealthway Financial Advisors. We don’t just do investment management or financial planning, we do both combined. Because we’ve learned through the ages. That that is where the maximum value comes from. You have to do both together if you want the best financial outcomes. So while we are normally talking about financial planning topics here. Given the state of the market, sometimes it’s appropriate for us to pause and focus in on the investments and what’s going on in the investment markets to help provide some perspective and calm any nerves that are out there. But before we do that, we do have a couple of callers on the line. So let’s go to those callers. First off, John in Virginia Beach. Good evening, John, you’re on Dollars & Common Sense.

Social Security And Windfall Elimination Calculations

Caller 

Hey, thanks for taking my call. I’ve got a question. When I look up my Social Security benefits, does that include my Windfall Elimination Act deductions or do I have to plug that in myself?

Allison Dubreuil, Wealthway Financial Advisors 

Good question, John. So are you a part of a pension plan that is subject to the Windfall Elimination?

Caller 

Yes. So I did 18 years with the local city here.

Allison Dubreuil, Wealthway Financial Advisors 

Yes, okay. So that is what’s very misleading about the Social Security statements, because no, the Social Security statement shows your benefit without factoring in the Windfall Elimination plan. So you are programmed to do that yourself. You have to do the math. They can run it for you. If you’re close to claiming and serious you can make an appointment and have them assess it. But you can probably easily do the math. I think there’s some calculators on their website and their website, www.ssa.gov is actually not terrible. So you can probably pull it up.

Caller 

Yeah, I’ve been on it. Not that bad. Yeah, I did. 18 years not paying in. And now I’m going to do 20 years paying and so hopefully that’ll help.

Allison Dubreuil, Wealthway Financial Advisors 

Yes, hopefully it will help. But it’s good that at least you’re aware of it. Because we we certainly know people who had no idea that that was going to be the case. And then that’s not a good surprise when you have to claim your Social Security benefit.

Caller 

All right. Thank you very much.

Best Way To Will A Property

Kevin Zywna, Wealthway Financial Advisors 

All right. Thanks for the call. John. Out to John in Chesapeake this time. Good evening, John, you’re on Dollars & Common Sense.

Caller 

Good evening, folks. Thanks for being here to take calls. I would like to know, my home is worth around $500,000. I’m getting on in years. We have a severely disabled daughter that lives with us. And when I pass on my wife, we would like the house to go to my son. He’s agreed to take care of our daughter and everything. But is that a good idea in terms of taxes and things like that, if he’s already on the deed, when we pass away? You know, would the house be automatically his with no questions about having to pay tax on it or anything?

Allison Dubreuil, Wealthway Financial Advisors 

That’s a really good question, John. Because a lot of times people do go through the steps of adding their children on to their house, or even an investment account thinking that that will just make it administratively easy  when you pass away. They’ll just assume ownership and the easiest way to handle it. But that can actually cause some unintended tax consequences. If you were actually to just leave the house to your son at your death, there would be what’s called a step up in basis where whatever the fair market value is of the home at the date of your death, that would be his new basis. And then if he were to ever sell the property, he would only have to pay tax potentially on the gain above the basis. If you have him as an owner, and you pass away, then he doesn’t get a step up to the fair market value.

Kevin Zywna, Wealthway Financial Advisors 

Okay. Oh, John, is he already on the deed?

Caller 

No, no, the idea is new to us. And we have five other children in addition to him, but they’re all in agreement, you know, with with this particular situation. I did question the mortgage company. And they told me that the only way he could be put on the deed is if we refinance, we would have to refinance. And of course, rates are starting to really skyrocket.

Allison Dubreuil, Wealthway Financial Advisors 

You don’t typically have to have all owners of a property on the deed.

Kevin Zywna, Wealthway Financial Advisors 

That one is either unique to that mortgage company, or maybe you didn’t get the most experienced person there. Because this is a more advanced transaction. But regardless, you don’t want to do it this way. Anyway, okay. So don’t go through with it.

Allison Dubreuil, Wealthway Financial Advisors 

Are you working with an estate planner at all? An attorney?

Caller 

We’ve got all the necessary documents done. I’m 75. And my wife is 74. And we’ve got all the necessary items right now in the will. The only change we would have to make is to specifically leave it to one of our children. Right now I guess it would be divided among all of them. And that’s what prompted us to start thinking we better wait because,  when a disabled person gets used to their surroundings, you know, it would be quite tragic on my wife and my part to think of her having to be institutionalized.

Allison Dubreuil, Wealthway Financial Advisors 

Was an attorney that specializes in estate planning the one who did those documents for you?

Caller 

She specializes in elder law, family law. Not necessarily estate planning per se. And to be honest with you, we don’t have a huge estate. The house is the only major asset that we have. There’s no stocks, bonds or anything like that. And just very, very small savings, not even enough to mention. The house is the only asset. What we’ve agreed to is, he will take it, he lives with us now. So it’s not going to be a change of lifestyle. But in the future, if he ever decides to sell the house, he would divvy up the profits among his brothers and sisters, whatever there is. There’s a fair amount of equity in the house right now.

Kevin Zywna, Wealthway Financial Advisors 

But the main reason would be to allow him to own the house so that your disabled daughter could stay there as well, correct?

Caller 

That that’s correct. Yes, sir.

Allison Dubreuil, Wealthway Financial Advisors 

Okay, well, something to watch out for. You just want to be careful if, at some point that chain of events happens, and I know it’s a lot of different things that would have to take place first, but you’d want to be careful about leaving anything to your disabled daughter. If she’s getting any sort of government benefits because that could disqualify her.

Caller 

Exactly. I’m glad you mentioned that as that’s definitely true. It’s been a battle but we’ve been successful, but just so I don’t take up too much of your time. Your recommendation or suggestion is that we leave it specifically to him in the form of a will. Include him in the will for the house?

Kevin Zywna, Wealthway Financial Advisors 

Correct.

Caller 

 Okay. Yes. Well, thank you. Thank you so much. That’s good advice. And I’m glad I just happened to hear you tonight and give you a call and thank you for being there. We really appreciate it.

Kevin Zywna, Wealthway Financial Advisors 

All right, John. Thank you. Thanks for the call. We appreciate it.

What Is A Bear Market

Allison Dubreuil, Wealthway Financial Advisors 

All right, tonight, we’re going to address the current market volatility and specifically give you some fun facts about bear markets. So while bear markets are terrifying, and we don’t want to not recognize that or invalidate those feelings, it can be very unsettling, it can be very scary for a lot of people. They are normal, they are inevitable. And most importantly, they don’t last forever. So we want to give you some information around bear markets and some statistics that can hopefully put your mind at ease and we’ll talk about what you should be doing when you come up against a bear market.

Kevin Zywna, Wealthway Financial Advisors 

So to put things in context here, if we look at the S&P 500 index, it peaked on January 4 at about 4818. As it sits as of today, it’s at 3941. That’s an 18% decline from its absolute tippy top all time peak to where we are today. There’s no really official designation for a bear market. It is kind of a colloquialism that has developed through the years. Just to add, I guess, more fear to the idea of a declining market. But it’s typically thought to be a 20% decline from peak to trough or greater, would be considered an official bear market.

And as we sit here today, we’re down only 18%. And while there have been some intraday moves down below that level, we have not closed below 80, or we have not closed below 20% as of yet. And as Allison was saying, in our world, this is all normal and natural. And something that we plan for, that we build into our financial planning analysis.

We know that there are going to be bear markets from time to time, on average, about one every six ish years or so. So if we know that that’s part of the investment process, then it would almost be you know, dereliction of duty, if we didn’t plan for it. So we always bake these into our financial planning modules, because they are reality. And they’re a fact of regular investing life.

What we don’t know is exactly when they are going to happen, how deep they’re going to go, when they occur, and how long they’re going to take to recover. Now we know averages around all of that, but no one and I repeat, no one can consistently time bear markets – market movements in the short run. So the people who try typically end up with a much more negative financial outcome than those who just accept the fact that these are reality of the investment process, and manage their way through them.

Allison Dubreuil, Wealthway Financial Advisors 

Yes, I think oftentimes, people think they need to do something – need to take action. Oftentimes, what you need to do is stay the course. If you are a long term investor that has a properly diversified and appropriate portfolio, then the best thing you can do is stay the course. And depending on the phase of life you’re in, add to your investment plan, because bear markets can actually be a very good thing for people who are still accumulating or saving for their nest egg, it’s buying on sale.

Kevin Zywna, Wealthway Financial Advisors 

Yes, if you’re in the accumulation phase, if you’re still working, still earning income, and maybe you’re contributing to your company retirement plan, the 401k, the TSP the 457 plan? Well, every contribution you make to the plan just means you’re buying more shares at a lower price. And when the eventual inevitable market recovery comes, then these are some of the best prices you’re going to get on those investment. Investments in the plan that you can find. And this is where the big money gets made. Those who have the courage to stay the course and work their way through the current temporary downturn.

Where Does The Term Bear Market Come From

Allison Dubreuil, Wealthway Financial Advisors 

Alright, so we’re going to pause for a first fun fact about bear markets. Let’s see if you know the answer to this. Why is it called a bear market?

Kevin Zywna, Wealthway Financial Advisors 

Because the market goes into hibernation?

Allison Dubreuil, Wealthway Financial Advisors 

Oh.

Kevin Zywna, Wealthway Financial Advisors 

Like a bear does in the winter.

Allison Dubreuil, Wealthway Financial Advisors 

I hadn’t heard that.

Allison Dubreuil, Wealthway Financial Advisors 

Okay. Well, I was reading and one theory is that it’s from back when there was pioneer trading, and the people who traded bear skins would sell it before they actually bought it like futures. And they would hope that the prices would go down so they’d be paying less for their bear skin. So Bear became synonymous with declining market.

Allison Dubreuil, Wealthway Financial Advisors 

Do you believe that?

Kevin Zywna, Wealthway Financial Advisors 

 No, that sounds too complicated.

Allison Dubreuil, Wealthway Financial Advisors 

Or some believe that it has something to do with bears how they attack that they swipe their claws downward. And that’s why it’s a downward trending market.

What Is The Average Bear Market Decline?

Kevin Zywna, Wealthway Financial Advisors 

Like we were saying, this is normal and natural in our world. It’s getting a lot of press lately. You’re seeing it on TV a fair amount. There’s a lot of concern about inflation, rising interest rates. The new variants of Coronavirus obviously the war in Ukraine, all these leading to a downward market. There’s always a crisis of the day. There’s always something giving a reason for market decline. That’s what we’re looking at right now.

Kevin Zywna, Wealthway Financial Advisors 

Tonight we’re talking about bear markets. We’re going to give you some facts and figures to hopefully demystify bear markets and hopefully make you feel a little better if you’re feeling uneasy about what’s been going on in your portfolio lately. We can talk about the definition of a bear market, I guess there’s a little bit of debate about that. But typically, it’s defined as a fall of 20% or more of an index from its previous peak. So if we are looking at the S&P 500, the previous peak was on January 4 at 4818. And we haven’t quite hit bear market territory. But we’ve been kind of dancing around the 18% decline range for a little while now. The average decline of a bear market if we look back all the way to 1929, the depression . The depression is where a lot of the statistics and the historical data goes back to. The average bear market decline has been 33.5%. But of course, that’s been violated before there have been a few times where the bear market has been more severe than 33.5 than the average decline. In fact, the most recent bear market was in March of 2020, when the Coronavirus was just starting to become a recognized serious pandemic and we had a very quick decline of 36%. From the peak, I think it was within three to four weeks.

Kevin Zywna, Wealthway Financial Advisors 

The fastest, fastest bear market in US history.

Allison Dubreuil, Wealthway Financial Advisors 

But then followed quickly after the fastest decline was one of the fastest recoveries.

Kevin Zywna, Wealthway Financial Advisors 

Yes.

Allison Dubreuil, Wealthway Financial Advisors 

So knowing that there’s going to be a bear market every so often, and that there’s average declines of about 30%. We build that into our planning when we’re designing portfolios and designing financial plans.

How To Manage Investments In A Bear Market

Kevin Zywna, Wealthway Financial Advisors 

Yes, I want to say a word about what happens when you go through a bear market. There’s a lot of talk in news media, and from some other advisors, that you lose money in a bear market. You don’t lose money, until you sell at a loss. We plan for bear markets. So that’s just a temporary decline in value, and no reason to panic or no reason to sell.

So losing money is usually a human phenomenon. It’s something that the investor himself does to himself, because he doesn’t like to see the value of his investments decline. And so in order to stop the bleeding, or ease the pain, he sells his investments, and then parks it in cash. Well, the problem is, then typically, you’re most likely to miss the inevitable recovery, or at least a good chunk of it. That’s how you lose money. It’s not the investments themselves that have lost money. Unless you’re investing in individual stocks, and yes, a company can go out of business, which means its stock goes to zero. But if we’re talking mutual funds, or exchange traded funds, the investments in your 401 K plan, your company retirement plan, most all of those are in mutual funds. Those are baskets of stocks, those don’t go to zero and stay there. So most people are their own worst enemy. When it comes to investing, you lose when you sell in a loss position.

If you are willing, if you have a strategy and investment philosophy in place beforehand, then you know that these are inevitable, you know that they are temporary. And if you are in the accumulation phase, then you take advantage of them by adding more money. When prices are lower. It’s counterintuitive. Everyone says it everyone knows what you’re supposed to do buy low, sell high. But very few people can actually get themselves to do it that way when the time comes.

Allison Dubreuil, Wealthway Financial Advisors 

It takes guts, it takes courage. It takes a plan the opposite of what most people are doing. So it’s difficult.

All right, so we’ve established a bear market is a decline of 20% or more from a previous peak. Now, how often do bear markets occur? Oh, and I should say the average decline over history has been 33.5 percent.

How Often Do Bear Markets Occur?

Allison Dubreuil, Wealthway Financial Advisors 

Now, how often can you plan on these occurring and it does depend on the source of information that you’re looking at and what they count as a bear market. But in our book, it’s every about six, seven years. once every six to seven years, you could expect a bear market. Even once a year, you could expect a drawdown of up to 14% or more that would be completely normal.

Kevin Zywna, Wealthway Financial Advisors 

Yeah, the average decline in any calendar year is 14%. So if that frightened you, if that, unnerves you, then you probably shouldn’t be an investor in the first place because you are likely to do the wrong thing at the wrong time at some point in the future. These are the things that we say are baked into the cake. This is normal statistical analysis around normal market movements, and would not be a source of concern for us at all. It’s the price that we all have to pay. This volatility is the price that we all pay for above average, long run rates of return that you can’t get in bank assets you can’t get in CDs you can’t get in bonds. If you want to enjoy a higher long, long run rate of return, then you have to accept temporary periods of below average market return. That’s how finance works.

What Causes A Bear Market?

Allison Dubreuil, Wealthway Financial Advisors 

Risk and Reward. Well, let’s talk a little bit more about the causes of a bear market. You already kind of mentioned it, but I think it’s worth going back to what causes bear markets. Well, if you turn on the TV, every person might give you a completely different answer today as to what is the cause of this bear market. And really, it could be anything. It could be any crisis of the day, it could be higher interest rates, inflation, military conflict, geopolitical crisis, politics, it can be any number of things. But it doesn’t mean that it is going to lead to a recession. So bear markets and recessions are always tied together. So I think that’s something important to know that there can be some temporary reason that people panic. But really, on any given one day, it just means there’s more sellers than buyers.

Kevin Zywna, Wealthway Financial Advisors 

And the reasons why are legions, there’s dozens of them. All you can really say at the end of the day is there were more sellers than buyers, and that causes price to decline. But yes, a bear market doesn’t in and of itself, typically ever cause a recession. What typically happens is bear markets precede or foretell a recession. The exception probably being the bear market of the Great Depression. That one, I think historians have largely agreed that that stock market decline was so quick and so disastrous, that it probably did cause the recession, which was so deep, we now call it a depression. But in almost all cases, the stock market leads the economy by about six months or so. But just because you have a bear market does not guarantee that there’s going to be a recession either. Sometimes a bear market leads a recession, sometimes a bear market just happens and there’s no recession. So, again, the idea that we might be seeing a recession here. It’s only probable it’s not guarantee.

How Are Bear Markets And Recessions Connected?

Allison Dubreuil, Wealthway Financial Advisors 

Here’s some numbers around that. So we we have some historical data, all the way back to 1928. 14 of the bear markets that occurred did precede a recession. But 11 had nothing to do with a recession. So it’s really not indicative of a recession. It’s a temporary decline in market value and your decisions and your actions during that decline in value will greatly influence your rate of return long run. We have the numbers on that, there have been studies done on average performance of portfolios versus average performance of investors. Investors underperform significantly because we’re human, we are emotional we can’t deal with the psychology and we make the wrong decision at the wrong time and we panic and move to cash and then the rate of return is a significantly lower.

Kevin Zywna, Wealthway Financial Advisors 

We want to get a few more key points in about bear markets investing in the illusion of safety.

Allison Dubreuil, Wealthway Financial Advisors 

Yes, so we’re trying to give you some fun facts around bear markets to demystify them. To hopefully make them a little less scary. The more knowledge you have, the more you can hopefully sleep easy at night. So a bear market is a decline of 20% from some previous peak, 20% or more. And they happen on average every, let’s call it six or seven years. And the average decline is about 33.5 %. And then we haven’t talked about yet how long the average bear market lasts. Now, it depends on how you measure it. It depends on when it’s over and when the recovery begins. But you can usually use a benchmark of about two years. Now that’s just an average. We already talked about the last bear market in 2020, where the recovery was like in four months. So of course, every time is different. What we know is they don’t last forever. That’s what we know. The long term trajectory of the market is onward and upward, long term. So there will be a recovery. It’s just a matter of when it comes

What Is The Stock Market?

Kevin Zywna, Wealthway Financial Advisors 

And the layperson goes. But how can that be? How can the stock market just keep continuing to go up?

Allison Dubreuil, Wealthway Financial Advisors 

Well, what is the stock market?

Kevin Zywna, Wealthway Financial Advisors 

Can it go to the sky? Is it infinite? Does it never stop? How can that be? Well, through the creative destruction of a capitalist economy,  destruction and construction. I mean, both actually, what was it 30 years ago? There was a Sears and a Kmart. But there was no Walmart and there was no Target. There was no Amazon. So the destruction, Sears and Kmart and the construction of new firms that are more profitable than they were. They merge and then the uncompetitive firms die off. So there’s always a growth aspect to the to capitalism, and especially the American economy, but other economies as well. And yes, as long as the economy and GDP continues to grow and thrive, then the companies that make up the stock market and their shares of ownership continue to grow. Except there’s periods of time where there are occasional temporary pullbacks, like we’re seeing right now.

Allison Dubreuil, Wealthway Financial Advisors 

Right. So I think it’s helpful to just deconstruct what the market is. That it’s companies that you’re investing in, companies that produce goods provide services have value.

Kevin Zywna, Wealthway Financial Advisors 

And turn a profit, which is valuable to investors. And that profit generally grows year after year. Albeit, when there’s a recession, we typically see a pullback. Or when a company no longer becomes well run and it’s no longer profitable, then the stock price starts to decline. But overall, in a big group, the companies in the United States tend to grow each year on average about, you know, 7% to 9%.

Are There Safe Investment Options?

Allison Dubreuil, Wealthway Financial Advisors 

All right. So then we want to address a couple things really quickly, before the end of the show. We want to address the illusion of safety. So oftentimes, the question is, well, where can I invest that my money is safe – that I won’t have to go through this painful bear market, but I still get the return of 7%. Safety, I think is an illusion, is something that’s sold. Like we’ve said, these bear markets are temporary, they are not permanent. The advance of the market, the trend of the market is permanent. So the odds are in your favor long term that you will have more money in the long term, than not, by being a growth-oriented investor. So when someone is talking about a safe investment, it might mean that there’s less volatility, but you’re going to be giving up a good portion of that long run growth in exchange for the illusion of safety.

Kevin Zywna, Wealthway Financial Advisors 

There is no free lunch. And if you are willing to hold your investments for at least a five year, closer to maybe 10 year hold period, which you know, most people are if you start out in your 20s in your investor you for the rest of your life. I mean, you’re 50 60, 70 years, you know, the probability is exceptionally high, that five plus years or longer. You’re going to have more money into the future than you do today.

How To Manage A Bear Market After Retirement

Allison Dubreuil, Wealthway Financial Advisors 

But what if you are retired and you’re pulling from your portfolio right now,?

Kevin Zywna, Wealthway Financial Advisors 

Then you have to have a contingency plan. You have to have a plan in place for when we go through these inevitable market pull backs. If you are living off the your portfolio and supplementing your lifestyle with a retirement paycheck from your investments, then it would be prudent to have a backup plan. And in our practice what we like to do –  because it’s very cheap, cost effective, because it’s very efficient ,and because it’s very liquid and flexible – is simply build up your bank account. Instead of having the normal three to six months emergency fund in a bank account, we usually like to see our clients have maybe a year, or sometimes up to two years, depending on their comfort level, if they’re really risk averse, have their expenses tucked away safely in a bank account. We know that there not earning any money in this interest rate environment. That’s not the main purpose.

The main purpose of that money is safety, security, comfort, peace of mind, so they can sleep well at night. And if we go into a bear market that is deep enough or severe enough or takes long enough to recover, then we can reduce temporarily reduce, or suspend, that retirement paycheck out of their investments, and then purposefully draw down on that cushy nest egg in their bank account. And their lifestyle never misses a beat. And they don’t have to worry about what the market is doing in the short run because they’ve got all their bases covered. And it’s very efficient, cost effective. You have a lot of control of the situation. And we have yet to really have a market that has tested any one of our clients’ bank reserves to any degree, where there would be concern.