The Next Decade Will Likely Foil Most Financial Plans

There are many individuals in the market today who have never been through an actual “bear market.” These events, while painful, are necessary to “reset the table” for outsized market returns in the future. Without such an event, it is highly likely the next decade will foil most financial plans.

No. The March 2020 correction was not a bear market. As noted:

  • A bull market is when the price of the market is trending higher over a long-term period.
  • A bear market is when the previous advance breaks, and prices begin to trend lower.

The chart below provides a visual of the distinction. When you look at price “trends,” the difference becomes both apparent and useful.

(Click on image to enlarge)

Decade Foil Financial Plans, The Next Decade Will Likely Foil Most Financial Plans

The distinction is essential.

  • “Corrections” generally occur over short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.
  • “Bear Markets” tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.

No Valuation Reversion

The last bullet point is the most important. During “bear markets,” valuations are historically reverted. However, during the 2020 correction, valuations not only did not revert, they actually increased.

(Click on image to enlarge)

Decade Foil Financial Plans, The Next Decade Will Likely Foil Most Financial Plans

The problem, of course, is that valuations tell you everything about “future returns” on invested capital. Such should be relatively obvious. If you overpay for a car, a house, or a tract of raw land, when you go to sell it, you will most likely not make money. The same holds true for capital invested in markets.

However, in the midst of a “raging bull market,” investors, in the short-term, lose sight of this long-term reality. As Howard Marks noted in a recent Bloomberg interview:

“Fear of missing out has taken over from the fear of losing money. If people are risk-tolerant and afraid of being out of the market, they buy aggressively, in which case you can’t find any bargains. That’s where we are now. That’s what the Fed engineered by putting rates at zero.

“We are back to where we were a year ago—uncertainty, prospective returns that are even lower than they were a year ago, and higher asset prices than a year ago. People are back to having to take on more risk to get return. At Oaktree, we are back to a cautious approach. This is not the kind of environment in which you would be buying with both hands.

The prospective returns are low on everything.”

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