Is Your Stock Portfolio Ready For The Next Bear Market? (VTI)

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September 20, 2017 10:19am NYSE:VTI

black-bear

From Grant Wasylik: If you’ve been invested in U.S. equities over the last eight-and-a-half years, pat yourself on the back.


Chances are, your staying power has paid off big-time.

Since the bottom on March 9, 2009, U.S. stocks have been on an incredible tear.

But it can’t last forever.



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If you owned either of the popular domestic-equity ETFs charted above (SPY and VTI), you’re sitting on massive gains.

The SPDR S&P 500 (SPY) is up 338%. And the Vanguard Total Stock Market ETF (VTI) — which covers large-, mid- and small-cap stocks — is up 351%.

Along the way, the ride has been smooth, too. No bear-market drops (20% declines). Plus, not one down calendar year for the S&P 500 Index in the past eight years in terms of total returns. And 2017 is shaping up to tack on another year to that streak. (The S&P 500 Index is up 13.1% year-to-date.)

Unfortunately, the average investor hasn’t enjoyed this ride.



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As you can see, the average investor has underperformed just about everything else over the past 20 years.

What’s stifling most investors?

Emotions.

The zigs and zags of the market lead most investors astray. This emotional roller-coaster ride leads to huge underperformance for the average investor. It looks like this:



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Now, picking bottoms is near-impossible.

The first chart showing returns for SPY and VTI starts from the S&P 500’s bear-market bottom. But, what if you were a “buy-and-hold” investor from the market’s top (before the fall) on Oct. 9, 2007?

Turns out, if you just hung on to a broad stock market allocation equity during the financial crisis, you would have done just fine in the long run.

Take VTI. Here’s a chart of the ETF’s performance from the index’s Oct. 9, 2007, peak …



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If you were able to stomach the 17-month bear market that plummeted 57%, you would have gotten your money back and then some.

Since Oct. 9, 2007 (nearly 10 years ago), the S&P 500 is up 101% (cumulative return) or a little over 7% per year (annualized return).

So, you would have technically doubled your money in VTI as a long-term investor. Even if you bought VTI on the worst possible day in the last 10 years!

Remember, bigger gains are needed to recoup bigger losses …



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Basically, the average investor would have been much better off owning an S&P 500 Index fund or an all-cap U.S. equity fund — and not touching it — over the last two decades.

The stock market will have another big decline at some point. It’s inevitable. From 1928 to 2016, the average times between specific market dips are:

  • 5% dip every 3 months.
  • 10% dip every 8 months.
  • 20% dip every 2-1/2 years.

We haven’t experienced any of those dips in quite some time. But, when we do, don’t overreact.

Here are some common-sense tips that could help you keep your emotions in check during the next bear market …

1. Tune out short-term forecasts. The market’s direction in the short-term is unknowable. The experts get it wrong more often than they get it right. This applies to predictions on market returns, professional GDP forecasts and the direction of interest rates.

For example, let’s review the semiannual survey of economists by The Wall Street Journal. From December 1982 to December 2015, the survey failed to forecast the direction of interest rates 64% of the time.

2. Avoid toxic investor behavior. Stay away from common negative behaviors like timing the market, chasing the “hot dot” (i.e., hot investment) and ignoring out-of-favor areas of the market.

3. Use systematic investing. Sign up for direct deposit in a taxable brokerage account … take advantage of a retirement plan where you can allocate a portion of each paycheck to investments (i.e., 401(k)) … and if you don’t need the income, switch your mutual funds, ETFs and dividend-paying stocks to dividend reinvestment.

4. Keep a well-diversified portfolio. Divide your wealth into different asset classes. Own domestic equities, international equities, large-cap stocks, small-cap stocks, global bonds, commodities, real estate, cash, etc.

Greater diversification results in lower risk. Numerous studies show that asset allocationaccounts for 90%-plus of your investment returns.

By diversifying across multiple asset classes, you can better protect your portfolio from market gyrations than if you only used a few asset classes.

5. Stick to your investment plan. Have an asset allocation plan in place. Other than annual adjustments and periodic rebalancing, don’t deviate too much from it. (If you have a life-changing event, you’ll need to re-evaluate your plan.)

6. Conduct your own portfolio stress test. The S&P 500 has experienced 11 bear markets (tumbles of at least 20%) since the end of World War II.

Apply a 20% stock market decline — or more if you wish — to the equity portion of your investment portfolio. Let’s say you have $100,000 in assets with 50% devoted to stocks. A 20% downturn in stocks means you could lose $10,000 of your nest egg.

Can you withstand a loss of that amount? Do you have time on your side to get it back? Will you be able to sleep at night? If the answers are “no,” revisit your asset allocation immediately.

For the record, each of those 11 bear markets mentioned above has been followed by 11 bull markets where the S&P 500 eventually closed at a new high. On average, it has taken the S&P 500 3.3 years after a bear market begins for the index to climb back and surpass its previous closing high.

7. Use protective tools for added safety. It’s easy to have a “set it and forget it” investment strategy. However, when the market is down 20%, the “forget it” part becomes increasingly difficult to “forget.”

Position sizing will help limit any one loss in your portfolio. And a stop-loss policy provides a clear exit strategy for any one position.

At the end of the day, if you’re trying to time the markets, you could miss one — or more — of the market’s best days. And that could end up being very costly to your bottom line …

Over the last seven calendar years (2010-2016), the best 18 trading days (18 trading days out of 1,762 ), were responsible for 63% of the S&P 500’s total return!

If you implement these steps into your investment discipline, you’ll be better protected during the market’s rocky days. And you’ll be firmly positioned to take advantage of the market’s best days when they arrive, as well.

The Vanguard Total Stock Market ETF (NYSE:VTI) was trading at $129.06 per share on Wednesday morning, up $0.09 (+0.07%). Year-to-date, VTI has gained 12.94%, versus a 12.86% rise in the benchmark S&P 500 index during the same period.

VTI currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #3 of 121 ETFs in the Large Cap Blend ETFs category.


This article is brought to you courtesy of Money And Markets.


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