Bear markets and financial planning

Bear markets and financial planning

A monthly business column by a Mercer Island financial adviser.

By Robert Toomey

Special to the Reporter

Most people are aware that the stock market has recently experienced what is referred to as a “bear” market. This term refers to a decline in the market of 20% or more. This most recent bear market has declined by about 35%.

Since 1948, there have been 14 bear markets that have experienced an average decline of about 32%. Bear markets occur periodically and are usually associated with a perturbationin the economy or financial markets that results in reduced expectations for corporate profits. The coronavirus event will most definitely have a material impact on the economy and corporate profits and investors are discounting this through lower stock prices.

So what does a discussion of bear markets have to do with financial planning? The primary job for a financial planner is to provide the client with objective advice as to the best manner, or “plan” for the client to successfully achieve his/her financial goals. These goals can be for retirement, education, estate planning, “peace of mind”, or really any goal that involves the utilization of a client’s financial resources, both income and capital.

Financial plans usually include an investment strategy that the planner believes is the optimal strategy for enabling the client to achieve their goals. This strategy most often will include a recommended asset allocation of both stocks and bonds. Therefore, trends and assumptions for financial market returns can and will have an impact on expected future financial resources.

A plan’s investment strategy is usually matched to the duration of the planning period, which for most people is decades. The measures we use to assess the strength of a financial plan take into account both projected market returns and volatility of returns over long periods of time (which includes bear markets).

History has shown that portfolios that are allocated between both stocks and bonds not only reduce risk (volatility) compared to an all stock portfolio, but also allow for a faster recovery of capital when markets recover. As an example, looking back over the past 70 years, while rolling 12-month stock returns have varied widely both positive and negative, a 50/50 blended portfolio of stocks and bonds did not suffer a negative return during any rolling 20-year period. This is important because it shows that diversification works in preserving capital over the long term and thereby increases the likelihood of the success of a financial plan.

So, coming full circle, how does a bear market like we are in now affect financial planners and our clients? In terms of the plan itself, not at all, really. We know bear markets happen periodically and this volatility is reflected in a financial plan’s assumptions. A client should not be overly concerned about a bear market as long as the client’s plan is grounded in sound assumptions, their investment strategy is appropriate, and the client remains disciplined in adhering to the plan over the long term.

Robert Toomey, CFA/CFP, is vice president of research at S.R. Schill and Associates on Mercer Island.


In consideration of how we voice our opinions in the modern world, we’ve closed comments on our websites. We value the opinions of our readers and we encourage you to keep the conversation going.

Please feel free to share your story tips by emailing editor@mi-reporter.com.

To share your opinion for publication, submit a letter through our website https://www.mi-reporter.com/submit-letter/. Include your name, address and daytime phone number. (We’ll only publish your name and hometown.) We reserve the right to edit letters, but if you keep yours to 300 words or less, we won’t ask you to shorten it.

More in Business

Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.
Is cryptocurrency really an investment? | Guest column

Undoubtedly you have heard about the new form of money known as… Continue reading

Front bar at Bellevue’s Civility & Unrest (courtesy of Civility & Unrest)
Two of James Beard Award-winning chef Jason Wilson’s restaurants to reopen in October

The Lakehouse plans to reopen Oct. 12 and Civility & Unrest reopens Oct. 14.

Stock photo
Grocery store workers have right to wear Black Lives Matter buttons

National Labor Relations Board ruling against ban by Kroger-owned QFC, Fred Meyer

t
Island HI FI president discusses National Black Business Month

“Being out here, like, I’m a unicorn. You don’t see that many Black people,” said Mercer Island business owner.

Big Island Poke in Renton (courtesy of The Intentionalist Facebook page)
Small-business advocacy group wants you to try minority-owned businesses and put it on their tab

The Intentionalist is opening up $400 tabs for folks to use this weekend at select businesses.

File photo
The Mercer Island Chamber of Commerce and surrounding businesses in downtown Mercer Island.
Islanders react to mask-free life as things return to normal

Business owners on Mercer Island are also excited to see customers return in greater numbers.

Eastside King County restaurant owners discuss challenges with U.S. Rep Suzan DelBene at Pomegranate Bistro in Redmond. (Photo credit: Cameron Sheppard/Sound Publishing)
Restaurant owners discuss labor difficulties with U.S Rep. Suzan DelBene

Experienced service and kitchen staff are reportedly hard to hire as food service reopens.

From left to right: Craig Wright, Mark Wright and Chris Wright, all co-founders of Wright Brothers Farms. Screenshot courtesy of Wright Brothers Farms
‘We view ourselves as temporary stewards of the soil’

Mercer Island brothers run family’s organic vegetable farm.

Dave and Buster's restaurant and entertainment venue looks to hire 130 people to staff its Bellevue venue, set to open in August. Photo courtesy Dave and Busters.
Dave and Buster’s hiring 130 for August opening in Bellevue

Dave and Buster’s restaurant and entertainment venue opens in downtown Bellevue on… Continue reading

Images of dishes from Issaquah’s Umi Cafe posted on the SMORS page. (Photo courtesy of Kristen Ho)
Facebook page promotes minority-owned restaurants across Puget Sound region

Miya Nazzaro used to be a member of Facebook pages that were… Continue reading

Jenn Boesenberg is the new director of Pixie Hill Preschool. (Courtesy photo)
Pixie Hill Preschool announces new director

Pixie Hill Preschool in Mercer Island has announced a new director, Jenn… Continue reading

The Moe Vegan food truck serves meals at the city of Kent’s annual Community Thanksgiving Dinner on Nov. 21, 2020. Sound Publishing file photo
King County fire marshals offer regulatory relief to food trucks

39 fire authorities have reportedly agreed to standardize fire codes and inspections.