Hello and welcome to the Farnam Financial blog!
In this first-ever post I’m going to talk about what’s happening financially in the U.S. right now, what’s not happening, and what steps you can take to help garner some financial peace of mind.
What's Happening
The stock market has hit a bump in the road. The technical term is a bear market. A bear market is defined as a 20 percent drop in market prices. For some historical perspective, since World War II we’ve had fourteen bear markets and they happen about every five and a half years. The average bear market takes prices down 30 percent. So what’s happening today? From our highs in February, the market is down about 23 percent. We went about eleven years without a bear market between 2009 and 2020. Having one now, while certainly painful, is perfectly normal.
The Federal Government and our central bank, the Federal Reserve, is taking every action it can to ease the economy from financial strain. Congress recently passed a $2 trillion stimulus bill to provide financial aid to both individuals and businesses. Assuming you’ve been filing your tax returns, you can expect to receive a deposit from Uncle Sam. You can read more on that topic here.
What's Not Happening
The economy is not collapsing. Even as non-essential businesses are asked to close their physical stores, most businesses are still operating online and remotely. Americans are highly adaptable and corporate America is finding ways for more workers to stay at home and continuing to work. That said, we are very likely heading into a US and global recession which could easily last for most of 2020. As the country begins to re-open, I expect a gradual recovery.
We are not experiencing a repeat of the 2008 financial crisis. Banks in 2008 were overexposed to bad mortgages and faced insolvency when the real estate bubble burst. Following that crisis, America’s major banks have been subject to annual financial stress tests to ensure there would be no repeat. Banks by-in-large have been passing these tests and are not facing insolvency today.
What Can I Do Now
To help protect your assets and ease the stress you may be feeling, here are two action steps that you can take to help gain financial peace of mind:
First, avoid watching the market too closely. Long-term investors are not helped by checking stock prices or portfolios value every day, week, or even month. In the same way that golfers cannot make birdies by staring at the scorecard, investors cannot improve their returns by staring at stock prices. Checking prices too frequently can create two outcomes that I want to help you avoid: 1) It can take time away from activities and person-interactions that are important to you, and 2) it can take share of mind away from experiences you would otherwise be enjoying. A dinner is a perfect time to share old stories or new jokes. Why spoil it by bringing up what’s going on in the market or talking about unrealized losses?
Let me pose a challenge to you. If you’re a long-term investor and your portfolio doesn’t require changes, stop checking your portfolio value. Remove the up-to-the-second stock quotes from your iPhone. Avoid the talking heads on financial news. Try avoiding the market for one month! Define a reward upfront you’ll give yourself for completing the challenge. Enjoy that reward at the end—you’ll have earned it—and, what’s more, enjoy all the days in between.
Second, start viewing your stocks as your business. A lot of people view stocks as ticker symbol that bounces around every day. But what stocks represent are fractional pieces of ownership in a real operating business. Any business is going to have its ups and downs. After eleven years straight years of ups in the stock market it’s time to face the downs. I have no idea what the market will do tomorrow or next month, but I suggest keeping your expectations low regarding returns in the market over the next year.
This topic reminds me of a quip that Warren Buffett once shared at a Berkshire annual meeting. “What’s the secret to a long-lasting marriage? It’s not brains. It’s not beauty. It’s not sense of humor. It’s low expectations.” As silly as it might sound, the same is true for ownership of stocks. If you’re a long-term investor and believe in the future, then presumably you want to stay married to those holdings. If you keep your expectations low the marriage will last!
America has been through wars, recessions, and pandemics before. We always find a way to overcome and come out stronger. That’s still true. We’re going to get through this. You are going to get through this!
Want to learn more about how to gain peace of mind with your investments?
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Jonathan Bird, CFP®
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