Why Bear Markets Shouldn’t Matter for Baby Boomers or any Investors
The ever-present and incessant chatter of the financial media has Baby Boomers anxiously pinned to their TVs, computers, smart phones and investment magazines as the so-called experts prognosticate on the coming bear market. Unquestionably, the stock market is at another crossroads, and its gains of 30%+ for 2013 and 13%+ last year contradict the concerns that most people have over the economy and the uncertainty that continues to blanket the markets. So, gloom and doom forecasts by a media anxious to sell papers or air time, should not be at all surprising. Even if we were to buy into the media hype, should Baby Boomers be at all concerned? In the overall scheme of things, should bear markets even matter to them?
We submit that the only thing about bear markets that should matter to investors is how they react to them. First, one shouldn’t be surprised when a bear market occurs. They happen with some regularity. While we can’t really predict when they will occur, we know that they will. And we also know that they will eventually give way to another bull market. In fact, there have been 23 bear markets in the last 100 years, each followed by a much longer-lasting bull market.
For long term investors, bear markets are healthy and necessary without which there would be no risk premium available in the market from which to generate returns. In essence, it is an efficient market’s way of pricing in the extreme unpredictability of long term returns in the shorter term. Investors with patience and the discipline to continue to invest during bear markets will be rewarded with higher returns during the bull markets.
Baby Boomers have much more to fear than a temporary stock market decline. With life spans expanding by the day, the worst fear of many Boomers is the possibility of outliving their income. The greater risk to retirees is their own longevity compounded by inflation, which has a 100 percent certainty of reducing their purchasing power over 25 or 30 years. Reduced purchasing power increases the need to draw down more income which can lead to premature depletion of investment portfolios.
Instead of fearing the stock market, Baby Boomers should learn to embrace the risk that can generate the type of returns that can extend their income while maintaining their purchasing power. Only through well-conceived, long-term investment plans that employ optimal diversification strategies can investors harness the risk in a way that captures the returns of the market while limiting the amount of portfolio volatility to a tolerable level.
There is no need to succumb to the noise and the hype of the financial media. If historical market performance continues just as it has for the last 100 years – through wars, recessions, government dysfunction, and fiscal crises – all that is required is a patient and disciplined approach to managing risk and return.
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Pilgrims Capital Advisors, Inc. is a Registered Investment Advisory Firm located in the state of Michigan.