Today might be a good day to reflect on the fact that in the Scripture, peace is promised to Jesus' followers.
"Peace I leave with you; my peace I give you. I do not give to you as the world gives. Do not let your hearts be troubled and do not be afraid." Jesus speaking, John 14:27
"I have told you these things, so that in me you may have peace. In this world you will have trouble. But take heart! I have overcome the world.” Jesus speaking, John 16:33
"The fruit of the Spirit is love, joy, peace ... and self-control." Galatians 5:22-23
If you're not experiencing peace today because of stock-market volatility, can we talk about that for a moment?
First, from a spiritual perspective, it may reveal that (1) you're overly focused on the material, and/or (2) you're not trusting your Heavenly Father to be a faithful provider. May I suggest that you stop and give thanks for the blessings in your life, and recognize that, in God's scheme, money is a "very small matter" (Luke 19:17). Nevertheless, He does provide protective principles in His word, and SMI attempts to translate those principles into specific, concrete steps you can apply in your financial life.
Second, from the perspective of an investor who has stewardship responsibilities, a lack of peace may indicate you haven't laid a strong financial foundation. If you've adhered to the priorities we lay out, you are following a spending plan, are debt-free (or well on the way), and have an emergency fund in place. In that event, a drop in stock prices is no threat to your current well-being. However, it can undermine your long-term success if you overeact to current events and deviate from your established plan.
Let's look at what time and experience have taught us about the markets.
1. The current bull market is about six and one-half years along. The average bull market of modern times has lasted less than four years. So, while we should give thanks for the growth in our retirement assets that we've experienced, we should also recognize that this bull may be nearing the end of its run. Three weeks ago, Mark made this point in Two Distinctly Different Views of the Market:
Of course, many SMI readers have already put in the effort to prepare themselves by creating a long-term plan and positioning their current portfolio so that it's ready for the next bear market, whenever that may come. If that's you, awesome, you don't need to do a thing! But if you don't have that type of confidence, now is the time to prepare — before the storm comes.... As we constantly weigh the risk/reward ratio the market appears to be offering, we know that the later we get into a bull market, the more that balance begins to tilt toward risk and away from reward. The time to be aggressive is when the last bear market is still close behind in the rear-view mirror. The longer the good times go on, the more we have to consider how we should appropriately prepare for the next bear.
2. If your retirement assets are being invested according to a personalized long-term plan, then you should actually welcome stocks going "on sale." As I say in my editorial coming out this week:
If you haven’t been investing with borrowed money, then you can survive any bear market. You just maintain your strategy and wait it out. But that’s looking at it negatively; lower stock prices are bad only for people who have to sell. They represent temporary bargain prices for people who have the money to buy. Are you prepared to systematically add to your holdings via a dollar-cost-averaging strategy?
It is only through the down phase of market cycles that we are given the opportunity to buy at unusually low prices so we can sell later at high prices. Properly prepared for, bear markets are more of an advantage than a disadvantage. You need to embrace the mindset that a bear market in stocks is an opportunity, not a threat.
3. As we near (or enter) retirement, we don't have the luxury of long time horizons and are understandably watching the markets with a shorter-term view because of our desire to preserve our capital. If you're in that group, we suggest adopting a plan that calls for an "orderly retreat" in risk rather than a wholesale "sell all stocks" panic approach.
In the September cover article, we offer our suggestions for how to put some protective boundaries in place, exactly what that looks like, and who among our SMI members should (and should not) adopt such a plan. We actually wrote this article over the prior few weeks, when the market was only 2% off its all-time high and a new bear market looked to be in the distance. Obviously, the events of the past three trading sessions have changed that perspective. Because of today's extreme volatility, we know fear/concern is growing, and so we are releasing this article, Bear Markets and Bondaries, early.
One aspect of the plan described in the article relies on an SMI tool developed years ago, our Bear Alert Indicator (BA). A Bear Alert doesn't mean we're in a bear market at the moment, but that based on historical patterns, one is likely to develop. The S&P 500 index set its most recent all-time closing high in May at 2,130.82. Under the BA rules, the S&P must have a weekly close of 15% below that high. That means a close of 1,811.20 or lower on a Friday (and only on a Friday).
As this is being written, the S&P is trading in the 1,920 area, which is about 10% below the high. Despite all the craziness of the past few weeks, we're still only 2/3 of the way toward a BA signal. We'll be keeping an eye on the BA and providing updates if it appears the BA may be triggered. If you'd like to receive an email each time we write about the BA, you can sign up for that on the Email Subscriptions tab in the My Account section.