Your Market Downturn Survival Guide

Mark Meredith, CFP®

Originally posted 01/24/2022

We all know equities can go backwards at times, and in a violent fashion. While it has happened many times in the past, and will happen many times in the future, when it happens it is only natural for a bit of fear to creep into your mind. Negative thoughts might appear such as:

  • “I don’t have time to wait for a recovery”
  • “This is going to get much worse”
  • “What if it’s different this time?”
  • “Maybe I’ll just sell everything until the storm clears”

The downturn you’re currently involved in usually seems much worse than all prior downturns. It’s only because you are currently living it, while all others are past and the memories are fuzzy. Currently as I write this, the S&P 500 is down about 11% from its peak while the Nasdaq is down nearly 17.5%. That may sound bad, but how bad is it?

Since 2009 we have seen about 8 similar drops of this magnitude or worse and 27 drops greater than 5%:

S&P 500 corrections

Despite all of those scary drops, the S&P 500 gained over 740% cumulative during the time frame. If you have survived all of these downturns, you likely will do well during the current one. Maybe market drops are a lot of fuss about nothing, and it’s best to hang in there?

“I Don’t Have Time to Wait For A Recovery”

If one cannot afford a market downturn, they should not have money in the market to begin with. If an investor is currently retired and living off their portfolio distributions, market drops are a little scarier but if the portfolio is structured properly they should have plenty of time to ride it out. If an investor is still earning income and saving, then they’ll be saving into stocks at lower prices.

I encourage investors to usually keep 5-10 years worth of anticipated distributions in lower risk fixed income investments. This allows them to take their distributions from that bucket while equity markets are turbulent. That way they are not forced to sell equities for distribution needs and lock in losses.

Below we show data looking at the US stock market since 1972, and the largest declines experienced.

US stock market declines

You can see here the longest underwater period in the US stock market since 1972 was about 5 years and 8 months. This probably overstates the historical downside as in my opinion it is illustrating a non diversified portfolio, concentrated only in the US stock market index.

“This is Going to Get Worse” and “Maybe I’ll Get Out Until the Storm Clears”

It could get worse. You’ll hear all kinds of nonsense at a time like this. Just under two years ago famous hedge fund manager, Bill Ackman, went on CNBC and cried that “hell was coming” (oh and by the way he netted a $2.6 billion gain on a $27 million investment against credit markets at the time….I’m sure he wasn’t trying to influence markets at all…).

Today we have legendary investor, Jeremy Grantham, predicting a 50% drop in stock prices. Here is some more good reading from Jeremy Grantham so you can verify how his prior calls have gone:

10/24/2012: Jeremy Grantham Warns 2013 Will Be A Dangerous Year For Stocks (US Stocks Gained 33.3% in 2013)

05/01/2014: Jeremy Grantham Says the US Stock Market will Crash Around the 2016 election (US Stocks gained a cumulative 25.7% from 05/2014 – 12/2016)

10/22/2020: Jeremy Grantham: The Market Bubble Will Burst in Weeks or Months (US Stocks gained over 28% in 2021)

Despite Jeremy Grantham being very wrong in recent history, he could be right this time. Who knows? But I believe my 5 year old possesses just as good of market forecasting skill as anyone else, and he doesn’t even know what the stock market is yet (we’re working on it).

Things can always get worse. Your portfolio should not be positioned in a risk you can’t afford to take.

Now should you cash out and sit on the sidelines until the sky is more clear? I can’t think of a worse idea. This is the ultimate trap, like the Sirens that tempted Ulysses. There is no “all clear” signal to invest in stocks. Risk appears and impacts markets very quickly, and a very large chunk of returns can come in a very short amount of time. Being on the sidelines means you miss it, and that can be a life altering decision.

On March 12, 2020 the S&P 500 experienced its 6th WORST day every, losing 9.51%. On March 13, 2020 the S&P 500 experienced its 10th BEST day ever, gaining 9.29%.

I have encountered people throughout my career who have liquidated their portfolios during bad times, trying to pinpoint a better time to reenter. One of two things happens:

1. The market does indeed continue to slide while they’re in cash, but they are too hesitant to pull the trigger on getting back in because they think things will keep unraveling. They miss the subsequent rally, and have a very hard time reentering because now prices are higher and they have to admit they were wrong.

2. The market rallies after they go to cash, and now they are backed into a corner. They either have to wait, hope, and pray that prices retract again soon or they have to now buy in at a much higher point and eat their losses.

It almost seems like buy and hold is easier, and data would suggest it has led to better outcomes historically. Why would you want to risk messing it up?

“This Time It’s Different”

As an investor you have a choice of two different four word phrases at a time like this, and which one you choose will determine your fate.

1. This time it’s different.


2. This too shall pass.

It is always different this time. No two periods are the same, and the world is evolving at a rapid pace. Accepting the world is now different is ok, but determining you have somehow seen a future not many others have and you need to liquidate all of your investments is probably not ok.

However, I think it would be hard to make the case that the current environment is “scarier” than that of past market crashes.

Here is a short list of what the US stock market has survived in its brief history:

  • World War I (40 million worldwide casualties)
  • The Great Depression
  • World War II (75-85 million worldwide casualties)
  • JFK Assassination
  • Vietnam War
  • Savings and Loan Crisis
  • Dotcom bubble collapse
  • 9/11
  • Housing Market Collapse

Despite all of the scary things that have happened and will continue to happen, $1 invested in global stocks in 1970 would have been worth $80 by the end of 2020.

scary market headlines

I am in the camp of “this too shall pass”. Join me.

Disclosure: Past performance does not predict future results. This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Meredith Wealth Planning deems to be reliable. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

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