While we attempt to build and secure our nest egg for retirement, there are several factors that impact our ability to do so.
For example, the effect of COVID-19 disrupted both supply and value chains around the world, which then combined with increasing geopolitical tensions, high energy prices, and a series of Federal Reserve rapid interest rate hikes. The result was a decrease in the savings rate and an increase in the cost of borrowing – the proverbial perfect storm.
When we talk about volatility, we refer to the liability to change rapidly and unpredictably, especially for the worse (as defined in the Oxford Dictionary). For many, the notion of volatility in the markets while preparing for retirement, and then actually retiring, can be unnerving to say the least! But, rest assured, all is not lost.
In her recent article, my colleague provided insight into the challenges facing today’s markets. She posited that although volatility cannot be fully eliminated, by applying just a few core investing principles you can reduce the long-term effects and impact of volatility on your retirement savings. Further, once sound investing principles are applied in alignment with your time horizon, risk tolerance, a bit of rationale, and some common sense, you’ll be in a much stronger position to absorb market fluctuations and in a far better position when markets recover (Seely 2022).
Now, let’s be honest, if you’ve become accustomed to acquiring the proverbial golden egg here and there, it can be quite easy to fall prey to the emotional highs and lows of being tied to the tide of the markets. Too often we forget that the new normal is, well, not so normal at all. Fortunately, historical data is often the best barometer to assess how markets have behaved over time and how to position for the future.
By studying time and money we’re not only able to invest with insight, but also to plan with perspective. According to the National Bureau of Economic Research, “Contractions (recessions) start at the peak of a business cycle and end at the trough” (a business cycle is defined by Investopedia as the fluctuations of an economy between periods of expansion [growth] and contraction [recession]).
Also, in reference to bear (falling) versus bull (rising) markets, the Hartford Funds website provides the following information:
- On average, stocks lose 36% in a bear market and gain 114% in a bull market.
- Since 1928, there have been 26 bear markets in the S&P 500 and 27 bull markets. For this period, the S&P 500 has returned approximately 8.61%, on average.
- Bear markets tend to be short-lived – 289 days (about 9.6 months), on average; bull markets average 991 days (2.7 years).
- Half of the S&P 500 Index’s strongest days in the last twenty years occurred during a bear market. Another 34% of the market’s best days took place in the first two months of a bull market.
Furthermore, according to NYU Stern School of Business, since 1960 we’ve seen average historical returns for the US during recessions as follows:
- Real Estate: -1.38%
- Corporate Bonds Baa: -1.18%
- 10yr Treasury Bond: 6.62%
- 3yr T-Bill: 0.78%
- S&P 500: -5.10%; since 1960, the average S&P 500 return the year after a recession ends is 14.04%
At the end of the day, if you’re 65 years experienced, according to stats from the US Federal Reserve Bank of St. Lewis, you’ve already lived through nine recessions (if you’re 50 years old, you’ve experienced seven, and 35 years old, four). As we look at the current trends, the best news is you’re already a financial gladiator – you’ve survived nine recessions and fourteen bear markets over a 50-year investing career.
History often provides the best window into the future. Remember, downturns have always been a part of life and investing. If you’re not sure if your nest egg will more closely resemble a golden goose or an ugly duckling, a qualified financial pensions advisor can help alleviate some concerns by providing you with the right tools and knowledge to help you navigate, build, and execute your individual financial plan for retirement.
To learn more about Pensions, Life, Investments, or if you have any other questions, please contact me,
Rickai Binns
Financial Pensions Advisor at Freisenbruch
Rbinns@fmgroup.bm or call (441) 538-1245 or (441) 294-4660
References:
Hartford Funds. n.d. “10 Things You Should Know About Bear Markets.” Accessed October 21, 2022. https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/bear-markets.html
National Bureau of Economic Research. 2022. “US Business Cycle Expansions and Contractions.” Public Use Data Archive. Last updated July 19, 2021. https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions
NYU Stern School of Business. January 2022. “Historical Returns on Stocks and Bonds and Bills, 1928–2021.” https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Seely, Carla. 2022. “Investing in a Volatile Market.” FM News (blog), Freisenbruch. Accessed October 21, 2022. https://www.freisenbruch.bm/investingvolatilemarket/.