“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
That quote, attributed to various humorists (including Mark Twain), seems especially appropriate right now. At a time like this, it’s important to discern what is really true. Since one of Sound Mind Investing’s goals is to simplify the complex—focusing on what you need to know rather than all there is to know—let’s take a look at what we know for sure that is certainly so.
We know that the world, and as a result, the markets, have been in turmoil because of the fast-moving COVID-19 pandemic. After setting a new record on February 19, it took a mere 16 trading sessions for the S&P 500 to enter bear market territory (a decline of at least -20%), making it by far the fastest switch from a bull- to bear-market in history. Previously, such a fall had taken an average of eight months!
We know that people feel the pain of loss more acutely than the pleasure of gain. So, given the speed and magnitude of this sell-off, it wouldn’t be surprising if this bear market has felt particularly jarring. It has been unusually painful in terms of its speed and severity.
But here’s what elsewe know—reassuring rock-solid truths from God’s Word and important lessons from market history.
Timeless truths from God’s Word
- We know we need not fear.“For God has not given us a spirit of fear, but of love and of power and of a sound mind.” 1
- We know God is always with us, always for us, and always loves us.“See what great love the Father has lavished on us, that we should be called children of God!” 2
- We know God is aware of our needs and promises to provide.“…your Father knows what you need before you ask him.” 3“So do not worry, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For the pagans run after all these things, and your heavenly Father knows that you need them. But seek first his kingdom and his righteousness, and all these things will be given to you as well.” 4
- Come what may in the markets, we know that God’s Word teaches us to be patient, to take the long-view. “Steady plodding brings prosperity; hasty speculation brings poverty.” 5
- And we know God has a purpose for every trial we experience, using it to mold our character and draw us closer to Him.“Therefore, in order to keep me from becoming conceited, I was given a thorn in my flesh, a messenger of Satan, to torment me. Three times I pleaded with the Lord to take it away from me. But he said to me, ‘My grace is sufficient for you, for my power is made perfect in weakness.’” 6
Lessons from market history
Investing is far from a perfect science, but we can learn from the past. Here’s what we know from previous bear markets.
- Every crash has unique causes...The COVID-19 pandemic-induced sell-off is different from the Great Recession of 2008, which was different from the bear market of 2000-2002.
- ...but every crash generates similar investor responses.Investors fear falling markets, and when people panic they make bad decisions. When fear drives people out of the markets, fear will tend to keepthem out of the markets until long after the inevitable recovery has begun.
- Every crash reminds us that it is crucial to have a plan.Such a plan, developed at a time of market calm, should include reliance on rules-based investment strategies and a “market events” statement where you commit to what you will do, or not do, at a time of market stress.7
Most historical bear markets have been measured in months, not weeks. So there’s a good chance the market’s recent volatility could be with us for a while. That’s especially true given the many unknowns regarding the future of the COVID-19 virus (does it come back?) and the economic impact of what has already occurred—and still may yet occur in the future.
Those operating from a solid, biblical financial framework will always be better equipped to handle periods of financial stress than those who aren’t. This framework includes an emphasis on minimizing credit card and other consumer debt, prioritizing an emergency savings reserve of 3-6 months’ worth of living expenses, and following a personalized “steady plodding” long-term investing plan.
One of the great lessons from history is that scary, market-moving events happen somewhat frequently. Yet despite these bear market periods, we know the market has always eventually resumed its “constant jagged climb” higher.8