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Taking Stock of Investments

By January 14, 2013October 26th, 2020No Comments

This article originally appeared in the Santa Barbara Independent online on December 15, 2008. To see the PDF of the article, click here.

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A Brief History of Bear Markets

By Kevin Bourke

Monday, December 15, 2008

“History may not repeat itself, but it does rhyme a lot.” —Mark Twain

One of the worst financial environments in memory has challenged many investors’ faith in the capital
markets. Are the capital markets going to continue declining? How low can the housing market go?
Unemployment is up, profits are down, foreclosures are up, confidence is down, the news just seems to
get bleaker by the day.

What’s next?

While past performance is no guarantee of future results, it does help to look at what happened in
previous bear markets and see what we learn. Going back to 1946, the median S&P 500 bear market
price decline of 21 percent has been followed by a 33 percent price gain within the next 12 months
(source: Zephyr). (All performance referenced is historical and is no guarantee of future results. All
indices are unmanaged and cannot be invested into directly.)

So should you be in the stock market? The answer to that question is … maybe.

Some are learning that they simply don’t have the stomach to ride out stock market gyrations, and that is
okay. While a financial advisor like myself may be able to present all sorts of arguments in favor of
remaining invested, investing is not done in a vacuum. As emotional creatures, we must acknowledge
that we have limits beyond which we cannot navigate without paying a toll.

For example, investors may implement approaches that seems acceptable for their risk tolerance, then
gasp when they open their brokerage statements. They may learn that they’re not capable of riding out
market cycles. What should they do? First, take a deep breath and allow the initial panic to subside.

Then ask yourself some questions. Perhaps you’ve decided that all of your investments will be gone
soon if the current rate of decline continues. Might you be extrapolating, which is defined as “to infer or
estimate by extending or projecting known information?” In other words, the market’s been going down,
and we therefore decide it will go down forever. Is that a reasonable fear?

Review your holdings. Are you well diversified? Do you have an asset allocation in place? Or is your
portfolio concentrated in just a handful of stocks or bonds? What are your long term goals? Have your
goals changed? How far off is retirement for you? Is there undue tension in the family because of
investment performance? Might you be able to adjust the level of risk in your portfolio?

If you have a financial advisor, can they walk you through their investment process and do you
understand it? Or are you taking investment positions without any overall plan? To determine which
investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Times like these do offer up some opportunities, but it’s important to follow these steps:

• Re-evaluate your risk tolerance

• Refine your investment objective to align with your risk tolerance

• Stay focused on the long term

• Use times of market fear to position for future returns

• Stay broadly diversified

These are difficult times financially, but if you take reasonable steps now, then when the storm passes
you can be prepared to move forward.