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Straight talk in confusing times
For many people, this is their first-ever experience in a bear market. And what a down! For everyone else (and we mean “everyone”), this is like none other. So we’re all “first-timers” in this one together. As you can imagine, there are a lot of questions and concerns. And we’ve got answers. You may not like them, but they’re objective and based on years of experience from John Hancock’s Team of Certified Financial Planners and Advisors.
The following is offered for informational purposes only. It is no way intended to be seen as personalized advice but rather thoughtful responses to customer questions based on years of financial experience, insight and observation.
First, a bit of housekeeping:
The COVID-19 pandemic and subsequent market downturn have effectively highlighted the advice that financial planners have been giving for years. It is in everyone’s best interest to have:
At least 6 months of living expenses saved as an “emergency fund”
A financial plan or strategy — written out — for their cashflow, savings and investing
Life Insurance coverage
An up-to-date Will, Health Care Directive, Medical and Financial Power of Attorney, Trust, etc.
If nothing else, please remember how important those things can be to you and your family. And now, onto the Q&A’s...
What is a bear market and how is it different from a market correction?1
A correction is a term for when an index like the S&P 500, the Dow or individual stock has fallen 10% or more from a recent high. A bear market occurs when the fall’s 20% or more from the peak for a sustained period of time — usually 2-month decline.U.S. stock indexes entered a correction in March amid fears about the impact that the COVID-19 outbreak would have on the global economy. As of this writing, it’s clear to all that we are indeed entering a bear market. Many experts had been anticipating if not predicting one for some time now (even before COVID-19), leaving some to believe we’re better prepared for it.
When’s the last time we had a bear market? 2
The last bear market for the S&P 500 took place Oct 9th 2007 through March 9th 2009. The index fell 56.8% in that 17-month period as the U.S. housing downturn and mortgage crisis occurred. For perspective, it was one of the longest bear markets in history, and the economy was able to bounce back even stronger.
How long do bear markets last and how deep do they go? 3
On average bear markets have lasted 14 months in the period since World War 2. Experience has shown the faster an index enters into a bear market, the shorter they tend to last. Historically, stocks take 270 days to fall into a bear market. When the S&P 500 has dropped 20% at a faster clip, the index has averaged a loss of 26%.
How does this market impact my 401k?
As with any market downturn, you can expect a decline in your account value. But our advice is to take the long view. Markets typically go up and down and you’re likely to experience several significant declines during a long investing career. But bear markets historically have been relatively short compared to bull markets (marked by steady growth and rising share prices). And since timing the market’s ups and downs is nearly impossible, all investors would do well to ignore the noise and stay focused on their plan.
Volatile (that is unstable) markets can also reveal that your portfolio isn’t diversified enough to weather these times. So if you haven’t looked at your portfolio recently to make sure you understand what each investment type (stock, bond, etc.) is doing and how that mix matches your target asset allocation (for your goals) and risk tolerance, now’s a very good time to do so.
What should I do with my investments?
It depends. You have to ask yourself has your risk tolerance changed or investment objectives changed. During periods of heightened market volatility, you should avoid big changes in your investment allocation unless your risk tolerance, risk capacity, or time horizon have shifted markedly. This is why it’s wise to have an investment policy and financial plan when you’re investing. A plan can help you remember why you are invested and remind you to periodically rebalance. Rebalancing is basically selling high and buying low to keep you aligned with your goals and objectives.
Whatever you do, don’t think of investing as an “all or nothing” proposition and don’t risk more than you can afford. Remember, investing is a long-term proposition.
How do I protect my future when the economy is so bleak?
Focus on the long term. If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the noise and focus on your long-term goals. And of course, get additional help from your advisor. If you don’t have one, you can talk to one of our financial experts about weathering market volatility.
At the moment, where is the safest place for my money?
First, there are three major variables to consider any time you invest money: your natural ability to deal with risk, the amount of risk you can afford to take, and the amount of time until you will need your money. All three are important considerations. Given the uncertainty of these times, our message to our customers is simply this: If you have a minimum of 3- 6 months of emergency savings, your portfolio is well diversified, your outlook remains long-term and you can rebalance your portfolio, then you should leave everything as is. Now, if staying diversified, focused and appropriately balanced doesn’t feel to you like you’re taking enough action, here are three considerations:
Add to your portfolio. Increase contributions to your retirement plan to take advantage of today’s rare buying opportunity of lower stock prices;
Shift your portfolio temporarily to a reduced equity (stock) position;
For retirees: reduce or stop monthly withdrawals from your portfolios and use your cash reserves instead for income until the economy stabilizes.
Should I keep paying down debt or save more given the state of the world?
We recommend paying off debt so that the interest doesn’t compound on you (meaning you end up paying interest on the interest). We’re also strongly recommending building an emergency fund. If you don’t have minimum of 3-6 months of savings to cover your living expenses, you might want to consider temporarily stopping 401k or IRA contributions. Once you’ve built up your emergency fund, you can resume your retirement savings.
Is now the right time to buy a house or should I wait?
Typically, we believe all important decisions should be based on your overall goals — not market volatility. But these are not typical times and so we are recommending to all of our customers not to make any big financial decisions right now. The priority being to hunker down and see where the economy goes over the next 6 months.
That said, mortgage interest rates are incredibly low. So if you have a current mortgage, you might want to consider refinancing and put the savings into your emergency fund or retirement account. Just remember, there are costs and fees associated with refinancing and we don’t recommend using any of your emergency funds towards them.
When should I dip into my emergency fund?
Those funds should only be used to pay for essentials — housing (rent or mortgage), food, transportation for work, immediate health care needs and utilities. If you don’t have an emergency fund for rent, read your lease and understand the eviction clause then talk to your landlord about deferring payment. Also, if you have credit card debt, call the credit card company and explain your circumstances. You may be able to skip a payment or enroll in a payment relief program.
A final thought (for now)
Despite the current crisis, we remain firm believers in the power of investing to achieve long-term goals. We will get past this crisis. But in the meantime, it’s best to focus on keeping our families and essential savings safe. You can be sure all of us at John Hancock will be closely monitoring the situation to keep you informed of future developments as they occur.
Financial planning and investment advice provided by John Hancock Personal Financial Services, LLC (“JHPFS”), an SEC registered investment adviser. Investments: not FDIC insured – No Bank Guarantee – May Lose Value. Investing involves risk, including loss of principal, and past performance does not guarantee future results. Diversified portfolios and asset allocation do not guarantee profit or protect against loss. Nothing on this site should be construed to be an offer, solicitation of an offer, or recommendation to buy or sell any security. Before investing, consider your investment objectives and JHPFS’s fees. JHPFS does not provide legal or tax advice and investors should consult with their personal legal and tax advisors prior to purchasing a financial plan or making any investment.