Oh my gosh!!!!  You mean to tell me that the market may not come back to all-time highs and that it could continue to go down?  Well, yes, that is always a possibility.  The second that you hit the buy button on your account (weather it stocks, mutual funds, ETF’s, or anything else market based) you are giving up control of your money to the market.  You no longer control it, the market does.  And the market is always right. 

It can be a scary feeling if the market is in control and not going your way.  With that being said, the first thing that a lot of people cling to is that “the market will come back”.  In my opinion, that will likely be true. After all, the stock market has come back to make newer highs 100% of the time from the start of its existence over 100 years ago.  So, with that being said, what is the big deal if the market is down?  The likelihood of it coming back is high, so why are we worried?

While it will likely come back, the question is how long will it take?  Let’s examine 2 periods of time that it took a bit longer than we liked.  While this didn’t happen with the S&P 500 near as much, these were also times of under-performance for the S&P.  Today, we will examine the Dow.

1.  2000-2011:  After the tech bubble burst in late 1999, it got pretty ugly.  It took about 13 years for the Dow to make new all-time highs.  Yes, it was close to achieving that in 2008, but shortly thereafter, the financial crisis happened and put markets back into a tailspin.  Eventually, new highs were made around 2011.  A lot of people refer to this as the lost decade.
2. 1966-1982:  This was another time that was not pretty for the Dow.  We were looking at record inflation along with a lot of other macro problems within our country. 

What if we see another market like that?

So, the first thing that comes to my mind is that if you have enough time to wait this out, then even these times are not that big of a deal on the grand scheme of things.  However, what if you do not?  How can you deal with a market situation like this?

I believe there are a few ways to address this potential problem. 

1.  Have a proper allocation:  If you are within a couple of years of retirement, or already in retirement, a downturn like this should not hurt you too much.  The reason is that you should have more of your assets in something safer than buy and hold stock market exposure.  Yes, there is a place for market exposure even well into retirement, but a good general rule is that the older you are, the less you should have there.
2. Dividend paying stocks:  While there may be a negative tax consequence for doing it, it could be worth it if you have a need for income in your retirement.  If the companies are solid, they will continue to exist throughout a tough market.  If there is a dividend component, it can be a great thing to weather the storm.
3. Covered Calls:  If you are not selling covered calls, it may be something to consider for a portion of your portfolio.  By doing that, it is a way to collect some income during a sideways market.

These are just a few things to consider when looking at your overall financial picture.  If you have any interest in discussing these and potentially other techniques, feel free to reach out to me.      mtosaw@rcmfs.com