The Planner's Perspective: Scare Tactics

Paul Morrone |

By Paul Morrone CFP®, CPA/PFS, MSA  ​

I was driving to work this morning and an ad came on the radio that opened with the line “The bull market is now 10 years old, which has never happened before. A recession is coming, is your advisor preparing you for the worst?” While this is hardly the first advertisement that I’ve heard like this, for some reason I kept replaying it in my head during the rest of my drive in. It got me thinking about the many TV commercials I’ve seen showing a bull and a bear, shortly followed by a red downward arrow and a message to ‘buy (some sort of esoteric investment) now!’ While we could spend hours dissecting each of these statements, and their many flaws, what you should be asking yourself is if you’re informed and educated.

Being ‘prepared’ insinuates that you (or in this case the people buying TV and radio ad space) know something, in this case a bear market, is coming, and that they have the answer to ‘protect’ you from financial Armageddon. I’ll be the first to challenge any of these folks to produce hard data that can show any tangible evidence for the exact date and time a correction or bear market will occur. Remember, bull markets don’t simply die of old age, there is always a reason that drives those steep declines in price that we all dread. Just because we’re currently in one of the longest bull markets ever doesn’t mean the sky is about to fall because it’s been ‘too long’ since it happened last.

While it’s true that markets inevitably go up and down, the impossibility is knowing when. By doomsday prepping for the worst, you could be doing more harm than good. A recent study by Morningstar presented an argument to substantiate this claim, and the results were even more intimidating than the thought of another bear market. It stated: “From 1997 through 2017, the S&P 500 returned 7.2% annually. But if you had been on the sidelines, for whatever reason, and missed the market’s 30 best days—a tiny fraction of the 5,217 trading days during that 21-year span—your stock portfolio would have lost 0.9% annually.” 1 The takeaway here is that many of these ‘best’ trading days can occur during the later stages of a bull market, and the cost to being out of the market, even for a few days, can be substantially more detrimental to your overall financial health than simply riding the wave and sticking to a prudent long-term investment strategy.

This doesn’t mean as an investor you should turn a blind eye to what’s going on in the world and how your portfolio is positioned. More importantly, you should have a keen awareness of your personal risk tolerance and the likely range of outcomes that your portfolio can produce given a myriad of different market conditions. This type of stress testing will allow you to hope for the best but understand the consequences should the worst happen.

When it comes to working with a professional, a good advisor will do more than manage your portfolio and should be your advocate to continually assess your risk tolerance and position your portfolio accordingly. More importantly, they should be your coach and help prevent you from making emotional decisions regarding your investments that could compromise the integrity of your financial plan. Furthermore, they should be discussing with you, in a language you understand, how a bull or bear market will impact your overall financial plan, current cash flow and long-term goals. Turning out the noise and remaining disciplined are proven characteristics of successful long-term investors, as painful as it may be for short periods of time. 

1 “Where to Invest When the Bull Market Ends”