Why preparing for market declines before they happen can help investors make more thoughtful decisions when uncertainty arrives
By Jeff Bernier, CFP®, ChFC, CFS | President & Wealth Advisor
Why We’re Sharing This Letter
Bear markets are an unavoidable part of long-term investing. We don’t know when the next one will begin, what will cause it, or how long it will last. We also don’t spend our time trying to predict those things.
Instead, we believe investors are better served by being prepared than by trying to forecast the future.
That’s why we’re sharing a letter today that is actually meant for some point in the future. This is not a prediction. It’s an exercise in preparation.
The letter below is written to investors as though the next bear market has already arrived. Along the way, we’ll also share some of the ways we prepare our clients for periods like these and the planning opportunities we may consider when markets decline.
Our hope is that reading it today, when emotions aren’t being driven by a significant market decline, can provide perspective on how thoughtful financial planning can prepare investors for periods of uncertainty long before they happen.
And when the next bear market eventually arrives, we hope you’ll come back and read it again.
A Letter to Read When the Next Bear Market Arrives
Dear Investor,
One of the greatest privileges of my career has been helping people navigate not only changing markets, but changing seasons of life. Over the years, I’ve walked alongside clients through bull markets, bear markets, financial crises, and periods of remarkable optimism. If there’s one thing I’ve learned, it’s that bear markets don’t just test portfolios. They test our emotions.
Even the most disciplined investors can find themselves wondering, Should I be doing something differently? That’s a perfectly natural reaction. In fact, it’s one of the reasons we’ve always believed that one of the most valuable things we can do as advisors is prepare our clients for difficult markets before they arrive.
If you’re reading this, the market has likely declined significantly. The headlines are unsettling. News anchors are debating whether things will get worse. Friends, coworkers, and neighbors are talking about what they think investors should do. You may even be wondering whether you should be doing something differently.
If that’s how you’re feeling, you’re not alone. It’s one thing to understand that markets decline from time to time. It’s another thing to watch it happen in real time.
Financial Planning Should Account for Uncertainty
When we build financial plans for our clients, we use reasonable long-term assumptions about investment returns. At the same time, we recognize that markets rarely follow a straight line. That’s why we also stress test our clients’ plans under a variety of market scenarios to better understand how periods of volatility and market declines could affect their long-term goals.
While we cannot predict when those periods will occur or how severe they may be, we can prepare for the possibility that they will. A financial plan should not be built on the expectation of perfect markets. It should be built with the understanding that investing involves uncertainty and that market declines are a normal part of the journey.
Our confidence has never come from believing we know what the market will do next. It comes from having a disciplined investment philosophy and doing the planning work before difficult markets arrive.
Bear Markets Test Our Behavior, Too
Carl Richards often reminds investors that the biggest risk during a bear market isn’t necessarily the market itself. It’s the decisions we make because we’re uncomfortable. Fear has a way of convincing us that taking action will make us safer, when in reality it may pull us farther away from our long-term goals.
“There’s a difference between what an investment earns and what an investor actually gets. The return can happen. And we can still miss it. Usually because we weren’t there long enough to receive it! That’s what I like to call The Behavior Gap.” -Carl Richards
Larry Swedroe has spent his career teaching that risk and expected return go hand in hand. We cannot reasonably expect the long-term rewards that stocks have historically provided without accepting that there will be periods like this along the way. Volatility isn’t evidence that investing has failed. It is one of the prices we pay for pursuing long-term growth.
“There is an old adage that “those who fail to plan, plan to fail.” Therefore, the first key to successful investing is to have a well-thought-out plan that includes an understanding of the nature of the risks of investing. That means accepting that bear markets are inevitable, and they must be built into the plan. It also means having the discipline to stay the course when it is most difficult to do so (partly because the media will be filled with stories of economic doom and gloom).” -Larry Swedroe
Ben Carlson has observed that every bear market feels unique while you’re living through it. The reasons are always different. The headlines are different. The fears are different. Yet almost every bear market shares one thing in common. It convinces investors that this time is unlike every other time.
“Corrections in the stock market are completely normal. It’s the cost of doing business. Future corrections will always feel different because markets and investors are constantly changing and evolving. That doesn’t mean you abandon risk assets because they make you feel uncomfortable.
You’re never going to survive in the stock market if you treat every downturn like it’s the end of the world.” –Ben Carlson
While every downturn has its own story, the emotional experience is remarkably consistent. Fear encourages us to focus on today’s uncertainty instead of tomorrow’s possibilities. That is why we believe so much of the work required to navigate difficult markets should happen before they arrive.
What a Bear Market Can Mean When You’re Near or In Retirement
For someone who is retired or approaching retirement, a significant market decline can feel particularly unsettling. You’re not only thinking about long-term growth. You may also be wondering where your income will come from and whether a downturn could affect the retirement you’ve worked so hard to build.
For our clients, this is one reason we think carefully about the role different investments play within a portfolio. Stocks may provide long-term growth potential, while high-quality fixed income and cash reserves can help provide stability and flexibility for nearer-term needs. The appropriate mix depends on each client’s goals, circumstances, risk tolerance, and time horizon.
If you’re still working, remember that your timeline has not necessarily changed simply because the market has. While declines are never enjoyable, continuing to save and invest through periods like this may still be appropriate depending on your circumstances.
Most importantly, remember that your portfolio is only one part of your financial life. Financial planning is about far more than investment returns. It is about having the freedom to retire on your own terms, spend meaningful time with the people you love, support the causes you care about, and use your financial resources to live a life aligned with your values and purpose. Markets may influence your portfolio for a season, but they do not define the life you’ve worked so hard to build.
What We’re Doing for Our Clients During a Bear Market
You may be wondering what we’re doing for our clients during a bear market. The answer is both simple and intentional.
We’re reviewing portfolios, evaluating rebalancing opportunities where appropriate, considering tax-loss harvesting and Roth conversion opportunities when they make sense, and reviewing withdrawal strategies for clients taking income from their portfolios. Just as importantly, we’re answering questions, revisiting financial plans when circumstances have changed, and helping our clients make thoughtful decisions instead of emotional ones.
There are also things we’re not doing. We’re not trying to predict when the market will bottom. We’re not reacting to daily headlines. We’re not abandoning our long-term investment philosophy simply because markets have become uncomfortable.
Experience has taught me that successful investing is rarely about making brilliant predictions. More often, it’s about avoiding costly mistakes.
Before You Make a Change, Ask What’s Actually Changed
Before making any significant financial decision, pause and ask yourself a few simple questions. Has anything about my life actually changed? Have my goals changed? Has my need for this money changed? Has my retirement timeline changed? Or has the market simply become more uncomfortable?
If something meaningful in your life has changed, it may be time to revisit your financial plan with your advisor. If only the market has changed, it may be worth remembering why your plan and portfolio were built the way they were in the first place.
One Final Thought
Years from now, I doubt you’ll remember the exact headlines from this bear market. You probably won’t remember the market’s lowest day or the commentators who seemed so certain about what would happen next.
But I hope you’ll remember this:
A financial plan shouldn’t be built for perfect markets. It should be built for real life. And real life includes uncertainty.
We cannot predict when the next bear market will arrive or what markets will do once it does. What we can do is prepare before difficult periods arrive, evaluate the opportunities they may create, and make thoughtful decisions when they do.
Warmly,
Jeff Bernier, CFP®, ChFC, CFS
President & Wealth Advisor
TandemGrowth Financial Advisors, LLC
About the Author: Jeff Bernier
