Is this the worst bear market ever?
Over the weekend, investors were hit with headlines declaring “the worst six months in the stock market in 50 years” and “tech stocks lose $1.6 trillion in the worst streak in six months.”
If you don’t look deeper, you’ll likely conclude that Hell was crumbling.
Unfortunately, there’s no doubt about it: The market has thrown in poor fashion this year, and the future is full of big challenges.
I have no interest in coloring any of the bad news. But thoughtful investors deserve more insight than they would get from the financial media’s quick conclusions.
Here are five lessons you may not have read about.
One: The first half of this year wasn’t even close to the worst six months investors have faced in the past 50 years. At the end of February 2009, the S&P 500 SPX,
It’s down 41.8% over just six months.
I am not attaching this to make you feel better. I think you should know this because things could (and maybe sometime in the future) be a lot worse.
Warren Buffett and other legendary investors have said that you should not invest in the stock market unless you are willing to lose half your money at some point.
One of the unpleasant facts in life is that losses in the stock market are normal. So do recoveries, which usually begin suddenly when no one expected.
two: 20% loss for the S&P 500 is big, but growing equity investors were worse: Big Vanguard VIGRX Capital Growth Fund,
It’s down 30.4% for the year, as of Friday.
Aggressive ARK Innovation ETF ARKK,
With approximately 22% of its holdings in just three stocks – led by Tesla TSLA,
— It’s down 55% in the year through Friday, as some former stock market darlings turned to dogs.
Motley Fool has published a list of the worst single stocks in the first half of the year (as of June 29), including four that have lost more than 62%: Netflix NFLX,
down 70.6%; Etsy ETSY,
down 66%; ALGN technology alignment,
down 63%, PayPal Holdings PYPL,
three: Many people have been deeply let down by some popular alternatives that have been sold as a hedge against inflation and bad times in the stock market.
Bitcoin just finished its worst month in its 12 years of existence, down more than 38%. Ether, the world’s second largest cryptocurrency by market capitalization, has lost about 47% in the first half of this year.
fourDiversification helps, although it usually cannot turn a losing period into a winning period.
In a recent article, Five great equity strategies over the past 94 years, I’ve described four relatively simple strategies for US stocks as alternatives to the S&P 500. Here’s how they held up in the first half of this year, based on best-in-class ETFs:
The four US funds, down 14.3%; (25% per AVUS,
All value of the two US funds, down 10%; (50% per RPV and AVUV)
A mix of large and small capital in the United States, which fell by 16%; (50% for both AVUS and AVUV)
Small cap value in the US alone, down 13.7%. (AVUV)
The advantages of high-value stocks, both large and small, have been the driving factors for the very poor performance of these strategies.
Investors often avoid value stocks, and in many years their returns are disappointing when compared to those of the S&P 500. But in many other years — and 2022 so far — value stocks provide better returns.
Based on data going back to 1928, in roughly one in every five calendar years, large-value stocks and small-value stocks were the best performers among all major asset classes. In 45 of the past 94 calendar years, small-value stocks have been the best performers.
five: bonds are tough. I often ask why any sane investor would want to own a bond. It’s a good question, and as far as I can tell, there are only three reasons to own a bond.
You can own the bonds in order to collect the interest payments. In this case, what happens to the price of the bond is irrelevant. You can’t be for sale.
You can own bonds in the hope of selling them at a higher price than you paid. This is basically a bet on the future of interest rates. If interest rates go up, your bonds will likely lose their market value; If interest rates fall, existing bonds become more valuable.
Most investors hold bonds for a third reason – to mitigate the ups and downs of the stock market. Bond prices rise and fall of course, but their volatility is usually less than that of stocks.
So far this year, bond prices have fallen. However, investors who owned bond funds lost less than those whose portfolios were entirely in stocks.
Our proposed tax-deferred portfolios include three classes of bond funds, each of which lost money in the first half.
Half of our recommended bond position in Medium-Term Treasurys SPTI,
Another 30% in short-term government bonds VGSH,
; They are down 3.0%.
The last 20% goes to inflation-protected Treasurys VTIP,
That fell only 1.6%.
I do not support long-term government bonds. It can appreciate strongly when interest rates are low, but it does not work well at all when interest rates are high. In the first half of this year, Vanguard VGLT Long Term Treasuries Fund,
It’s down 21.3%, about the same as the S&P 500.
All this, of course, relates to the past. The really important question at this point is what now?
Will the stock and bond markets continue to decline? Do they go in opposite directions? Will they both go up for the rest of 2022? Of course there’s no way to know, but if you check back with me in six months, I’ll be able to tell you exactly what your best move this week could have been.
Lacking this insight, I can only refer to the fourth point I made above: diversification helps. This is not likely to make any headlines in the financial media. But it should never be beyond your consciousness.
For more of my thoughts on the first half of this year, check out my latest podcast.
Richard Buck contributed to this article.
Paul Merriman and Richard Buck are the authors of We Talk Millions! 12 simple ways to increase your retirement rate. Get your free copy.