January 15, 2019
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Financial Planning in Bear and Bull Markets

The recent volatility in the market and the sharp decline in stock values seem to signal the inevitable end of the bull market run that traditionally marks the start of a bear market. While experts are inclined to believe that an economic slowdown is imminent, volatility and drops in stock prices alone do not create a bear market. Instead, multiple factors generally mark the end of periods of growth that span over several years. It is no secret that the tax cuts during the beginning of the previous year sparked an increase in corporate spending. However, these can be short-lived and may have caused a false sense of security in terms of overall economic development. However, regardless of the current market conditions, individual investors should not fear the normal patterns, and their transitions as these are well-documented in history.

What goes up will come down

Every market has an end and will be followed by the opposite. Meaning, if in a bull market, a bear market will follow. The reverse is also true. Timing the end of a market is a dangerous game and can greatly diminish the value of a portfolio. This indicates that financial planning and risk management is essential to every investor’s portfolio as these events are unavoidable. Most financial analysts and planners suggest that people need to stick to their long-term strategies and avoid making rash decisions based on short-term events. While economic slowdowns will cause a fall in stock prices, strategies that involve a long view will account for the periods of correction in the stock market. Therefore, reacting outside of the planned strategy will only make the situation worse. As with any event, the first step is to remain calm and objectively assess the situation.

Planning and strategizing the market

Experts in the stock market state the obvious. The idea of investing is to purchase low and sell high, thus obtaining value. However, timing the market to purchase when the price of a commodity is at the low end of the spectrum and selling near the peak is a guessing game. Yes, there will be people that are successful. However, these are outliers and not common results. While it may be a painful experience to see a portfolio decline in value, the long-term average return of the stock market is 10 percent. Therefore, holding on and enduring a decline is not a bad strategy. Furthermore, investors can adjust their investment strategy to diversify and offset some of the losses including purchasing alternative equities or stocks in other countries. Thus, wealth management in any market condition is essential to maintaining the overall value of a portfolio in a game that should span decades of differing economic conditions.

How to adjust from bull to bear?

The first step toward surviving the changing market is to understand that panic is counterproductive and that all markets, good and bad, have a beginning and an end. If you’re worried, you also should know that holding cash is not a bad idea. Some experts suggest that opening up a money market account or investing in U.S. Treasury Bonds can help investors during a bear market. Bonds can also help diversify a portfolio. Other ideas include purchasing dividend-paying or defensive stocks. Those that pay dividends provide a steady source of revenue. Defensive or non-cyclical companies are also a low-risk investment that tends to remain stable in any type of market. Although these do not provide the type of return that makes them attractive in bull markets, they are a great source of stability during recessive times. Ultimately, all types of investors need to understand that these changes follow normal economic patterns. Adjusting wisely while not overreacting is indispensable.

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