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Don’t Panic — Bear Markets are Just a Normal Part of the Market Life Cycle as an Investor

After reaching highs in early January, the S&P 500 and NASDAQ both plunged into a bear market territory, falling more than 20% to close out the first half of 2022. This tumble prompted renewed interest in an age-old question: Are we in a bear market? And if so, what does that mean for the individual investor?

Bear markets are generally defined as a drop of 20% or more in an index or security

Some bear markets are short-lived, as we experienced in 2020 with the COVID-19 lockdown, but some can be prolonged, as we saw with the Great Recession.

Following the six-month tumble to start this year, investors are trying to determine whether security prices will continue falling or if the worst is behind them. Regardless, this news serves as a critical reminder that stock prices don’t simply go up in perpetuity, and a bear market can present investors with new opportunities.

There has been no shortage of bad news for investors in the first half of 2022

Between supply chain issues, labor shortages, spikes in home prices and rent, and the highest inflation in 40 years, investors have to worry about various risk factors to develop a sound investment strategy.

None of us has a crystal ball to peer into the future of the financial markets, so it doesn’t matter that investors can’t predict the future but rather how we respond to market turbulence and build our portfolios.

The Economic and Financial Markets Cycle

Behavioral finance experts tell us that investors often let emotions cloud their best judgment and drive decision-making that is ultimately at odds with their long-term investing goals when it comes to the economy and financial market cycles.

When markets shift, the temptation is for investors to buy high and then panic and sell low. The debate over whether or not we are currently in a recession is a popular topic on social media. Still, financial markets have already priced this economic contraction for equities and fixed-income securities. The real question is how long these headwinds will persist.

Investors have more access to important information about the economy and financial markets

Today, investors have more access to important information about the economy and financial markets than ever before. In addition, it has never been easier to begin trading with numerous financial technology “apps” offering easy access to trading platforms. Consequently, investors are much more likely to react — positively or negatively — to any market changes.

Experiencing nearly 13 years of market growth, many of today’s investors may have felt invincible, buying stocks or trading options before our economy turned toward recession.

Every investment may have seemed like a winner, and many people were making money. However, the extended market cycle — and historically unprecedented fiscal and monetary policy stimulus during the COVID lockdown — created false expectations. People thought that the good times would continue for the foreseeable future.

Unfortunately, many overconfident investors bought high — just as the market crested

“Don’t fight the Fed” is a commonly used phrase on Wall Street. During the peak of the COVID-19 pandemic, unprecedented fiscal and monetary policies created a significant tailwind for most investments.

Congress enacted laws to put money in the hands of companies and American consumers. As the federal government handed out stimulus money, the Federal Reserve had accommodative policies that pumped cash into the economy as well.

These policies extended the bull market through the pandemic’s early days, and many investors did great.

But “Don’t Fight The Fed” works in both directions. First, the Federal Reserve has pivoted to restrictive policies to try to contain inflation and is now aggressively raising interest rates.

As of this writing, inflation is still at the highest level since the early 1980s, so the Fed is likely to continue to use all weapons in its arsenal in an attempt to tamp down inflation.

With the significant pullback in equities in the first half, particularly in most of the large-cap technology names, fear is causing many retail investors to sell, thereby locking in their losses and limiting their ability to grow their money over the long term.

A Normal Part of the Ebb and Flow of the Market Cycle

Coming down from an extended bull market period, the market’s pullback from historical highs makes it difficult for most investors to understand that these ebbs and flows are a normal part of the market cycle. No market goes up forever, and stocks will eventually have to be repriced.

That said, no one knows what will happen in the markets day-to-day, so trying to time the market is often a fool’s errand — and panic is not a strategy. As long as you have the appropriate diversification in your portfolio based on your individual investment objectives, don’t panic! Instead, sit back, relax and let the market do its thing.

Diversify and Invest According to Your Timeline

A recession is also a normal part of the life cycle. As long as your portfolio is diversified and you’re investing according to the timeline for your specific goals, there is no reason to panic.

Investing to achieve various goals — whether to retire comfortably in 20 years, go on vacation next year or purchase a new vehicle within the next five years — can be pretty straightforward. The key is ensuring your investment allocations sync with the timelines for each goal. In addition, focus on the long term, diversify and avoid products with high fee structures.

Look at your time horizon for the objective for which you’re saving and invest according to that horizon. For example, if you are many years from retirement, your retirement allocation will probably be close to 100% in equities.

Your money should be in a well-diversified portfolio so you can walk away and forget about it.

The money you’re investing for your vacation next year will be mainly in cash and cash equivalents like certificates of deposit (CDs). However, for goals that may be a few years out, you should utilize fixed-income securities — perhaps fixed-income exchange-traded funds.

As your goal investment horizons get longer, equities become a more prominent and more significant part of that portfolio. But always be aware that if you are selling investments supporting long-term goals, you are effectively locking in the loss.

Diversification is Key to Any Long-Term Investment Strategy

Instead of having all your money in one security, it’s essential to allocate investments to each goal you’re saving toward. You might get rich if you’re investing all of your money into one stock, option, or cryptocurrency. But for everyone on social media bragging about how much money they made off one trade, for example, thousands of others lost everything.

As a result, investors need to understand the difference between investing and having a solid investing strategy versus speculation or gambling.

Do you understand the investment you are considering and why it is going higher or lower? While numerous media outlets now focus on short-term trading, investors must realize that this is speculation, not investing.

Long-Term Investing Can and Should be Easy to Understand

Taking a long-term approach to investment should not be stressful, nor should it take a lot of effort or management. But developing a long-term investment strategy isn’t the hard part — it’s sticking to that plan in the face of tumultuous market environments.

As investors, we should feel good about putting our money to work for us, not stressed out, panicky, or constantly checking for updates.

Stay away from get-rich-quick schemes and short-term speculation that is difficult to understand. As Jack Bogle once said, “investors win; speculators lose.”

Featured Image Credit: Photo by Liza Summer; Pexels; Thank you!

Spring is the season for cleaning and that shouldn’t just end at home. Your finances should go through a little spring cleaning themselves. Having an organized financial life can help you better understand the flow of your money. Tracking your income, how you spend it, and how much of it you save can give you the information you need to set financial goals for yourself.

So, while you’re decluttering your closet, remodeling your back patio, consider some financial spring cleaning, as well.

Here are some ways to organize your finances this spring (or anytime, really):

financial spring cleaning

Review and Establish a Budget

To ensure your finances are in order and that they remain that way, it’s best to set up a balanced and realistic budget, if you don’t have one already. Review your monthly income and expenses then establish what your financial goals are. You could be saving for a long-term investment like a down payment on a home or you could be saving for a new gaming system or a getaway.

Whether it’s a long-term or short-term goal, budgeting is essential to making sure those goals are achieved. Organize your budget on a simple spreadsheet and review it often to ensure you are on track.

Having a budget will make it easier for you to reach your savings goals because it’ll help you determine how much money you can spend and how much you need to put away. You don’t need to plan out the rest of the year perfectly but instead start by creating a monthly budget, then track your finances for that month. Once you get into the habit, you’ll find yourself becoming a budgeting expert.

organize your finances

Set up a Money Pool/Automated Savings

One way to keep yourself organized financially is to set up automated savings, or an interest-earning Money Pool, like the one we offer at Marygold & Co.

Having a Money Pool allows you to separate and categorize your finances all within one account, making it easy for customers to track multiple savings goals at once.

Each individual can customize their automated savings to best align with their goals and current financial standing.

You can choose to contribute to your savings goals on a bi-weekly or monthly basis, and the amount you deposit is up to your discretion as well.

Automating your savings will help prioritize your goals and will reduce the temptation to overspend. You don’t even have to worry about making those regular deposits, it’s all done for you!

Pay Off Outstanding Payments

Look over any outstanding payments, if you have the means to pay them off, then do so. If not, this is the time to work out a way to pay your debts off.

Is there anything laying around your house you could sell? Are there extra shifts you could pick up at work?

Find opportunities that’ll help you earn that extra income to help you pay off your debts.

If you are unable to pay everything off right away, setting up a debt repayment plan can help you stay on track. While you may not pay everything off in one go, at least you have taken steps to reduce that debt and eventually eliminate it.

Make sure you include your debt payment plan in your budget.

This will help you stay on top of your payments by ensuring there is money available in your checking account to contribute to this payment plan.

Automatic Billing and Investments

Having your bills automated can help you ensure that they are always paid on time and that you’re not rummaging around for extra cash to meet your phone bill payment at the end of the month.

The best part about automatic billing is you don’t even have to think about it, it is automatic after all.

Additionally, you can even set up automatic deposits to your IRA or 401k investments. Automating deposits into these accounts will ensure you’re continually investing your funds.

The advantages of investing your money include reducing your taxable income for the year.

control your spending

Analyze Your Spending Habits

Analyzing your spending habits will help you point out your spending habits, bad and good. When looking over your spending habits, you might find some patterns that are preventing you from achieving your financial goals.

An important step while spring cleaning your finances is to look over your spending habits and find areas where you can save.

Are there any unnecessary monthly subscriptions billed to your credit card?

Are there unnecessary transactions you can eliminate?

These are important questions to ask yourself when analyzing your spending habits. Find areas in your daily life where you can save. Maybe pack a lunch instead of ordering out every day, you’ll definitely see big rewards from the small changes you make in your daily habits.

If you lack financial discipline, the Marygold & Co. app can help. The customizable security dashboard allows customers to limit where the card can be used.

Accounts can also be turned on or off – which can also remove the temptation to unnecessarily spend.

Clean Up and Shred Old Paperwork

It’s easy for those paper bills and bank statements to pile up on the corner of your table.

Marygold & Co. can help you keep your finances organized. The best part about the Marygold & Co. app is that you won’t have to worry about paper – checks, receipts, pay stubs, etc.

Take the time to shred and discard any old paperwork. Make sure you dispose of these documents properly as they contain very sensitive information including personal information and bank statements. We recommend using a shredder to ensure these documents are properly destroyed.

Marygold & Co. Makes It Easy

Marygold & Co. can help you sort your finances and keep them organized throughout the year through an innovative new app launching this spring.

The FDIC-insured fintech app offers customers interest-earning savings accounts and allows them to send, receive, spend and save securely through their mobile device.

Control and organize your finances easily with Marygold & Co.

Your finances will never have to go through a spring cleaning again – instead, you can keep them clean and organized.

A basic thesis on Wall Street is that what has worked well in the last market cycle is likely to underperform in a new cycle, and conversely, the underperformers of the last cycle can or should be the outperformers of the new cycle.

The basic logic is intuitive – an asset class that had been a leader in the previous run-up will, at some point, become overpriced and will struggle in the future without significant earnings growth to support the higher prices.  

Historically speaking, small caps outperform large caps. 

This makes sense because investors need to be compensated for the increased volatility and risk in the small-cap space. 

Also, over the long term, value stocks outperform growth stocks. 

Since 1926, value investing returned 1,344,600% vs. 626,600% for growth stocks, according to Forbes Advisor. And some of the most famous investors on the planet (think Warren Buffet and Benjamin Graham) are value investors.     

But largely none of these long-term trends mattered over the last few years of this past market cycle. 

The bull market of the last decade seemed to make investing quite easy, large-cap growth dominated, and as long as you held the big-name tech stocks your portfolio, probably did well.  

This trend was exacerbated during the COVID-19 global pandemic. 

During the 2020 bear market caused by the pandemic, U.S. markets bottomed on March 23, 2020. From that bottom, the S&P Growth Index initiated a historic recovery and peaked on September 1, 2020.  

Much has been made in the media about how quickly markets recovered from the market bottom, but that outperformance was mostly a product of the “Big 5” stocks (Alphabet, Amazon, Apple, Facebook, and Microsoft).  

As of September 2, 2020, those five stocks had a year-to-date performance of 65%, the other 495 stocks in the S&P 500 had a total YTD performance of just 3%. Since the fourth quarter of 2020, the story has begun to shift to the performance of small caps and specifically small-cap value. 

At the end of the first quarter of 2021, the top two performing sectors of the S&P 500 were Energy and Financials.  

reversion to the mean

What Does it Mean?

Is the “reversion to the mean” a story of small caps over larger caps, or is it Energy & Financials over Tech and Consumer Discretionary?  

It is still early and we will continue to watch how this plays out.  The main point here is to not be married to a thesis that worked very well in 2020, because the markets may have already started to revert to the mean.  

“This time is different” is a phrase commonly heard toward the end of market cycles.  

If you hear someone tell you that “this time is different”, run! This time is not different.  

Math does not evolve over time. Corporate price/earnings ratios and other investment metrics matter just as much as they have in the past.  

Don’t chase performance.  

What happened in the past, even in the recent past, is not guaranteed to continue in the future.  

“We engage in the folly of short-term speculation and eschew the wisdom of long-term investing.  We ignore the real diamonds of simplicity, seeking instead the illusory rhinestones of complexity.”

– John C. Bogle, Enough: True Measures of Money, Business and Life

The idea of investing to achieve our goals CAN BE very straightforward.

Focus on the long-term, diversify, and do not use products with high fee structures.

The world of investing does not need to be complex and stressful. However, there are some investment firms that seem to do a pretty good job of making it seem so complex that most of us could not figure it out on our own, and this is just simply not true.

Long-term investing can and should be easy to understand.

investing vs speculating

Trading Options

I’ve had several people talk to me about trading options recently.

Perhaps because of recent congressional hearings or perhaps because now even the more conservative retail investment firms are running TV commercials talking about trading “iron condors”.

My opinion is, for the large majority of retail investors, options involve more risk than upside and should be avoided.

Ask yourself, “Who is on the other side of that trade? For me to win my bet, who has to lose?”

Then perhaps ask if you feel you have better information than the large Wall Street firms?

wall street buildings

“Wall Street investment banks are like Las Vegas casinos: They set the odds. The customer who plays zero-sum games against them may win from time to time but never systematically, and never so spectacularly that he bankrupts the casino.”

– Michael Lewis, The Big Short: Inside The Doomsday Machine

It is important to understand the difference between investing vs speculating.

Do you understand the investment you are considering, and why it is going higher or lower?

Do you have experience in the industry and know who is taking the other side?

We have numerous media outlets that now focus on short-term trading, which is fine, as long as we understand that this is speculation, not investing.

investing vs speculation

Investing should not be stressful! 

We should feel good about putting our money to work for us. And if we have a long-term approach it doesn’t take a lot of work on our part. As long as we understand our goals and match our investment strategy to meet those goals, it becomes a straightforward endeavor.

And stay away from get-rich-quick schemes and short-term speculation that is difficult to understand. Knowing the difference between investing vs speculating is empowering.

In the profound words of John C. Bogle…

“The obvious conclusion: investors win; speculators lose.”

– John C. Bogle, Enough: True Measures of Money, Business and Life

Thanks to COVID-19, most of us really don’t want to hand our card to someone or touch a potentially contaminated PIN pad on a POS device.   Questions about passing germs and touching common surfaces have boiled to the top of our everyday thoughts.

What if there was a way to pay without worrying about the cashier handling your card or whether the payment processor has been sanitized?

Let me introduce you to the world’s newest buzzwords: contactless payments.

What Are Contactless Payments?

Investopedia defines contactless payment as a “secure method for consumers to purchase products or services by using a debit, credit, smartcard or another payment device by using radio frequency identification (RFID) technology and near-field communication (NFC).”

Now that may sound confusing. Essentially a contactless payment is exactly what the title states – a way for you to make a transaction without handing the card to the cashier, swiping your card, or even touching a point-of-sale terminal. This process allows customers to tap-to-pay rather than inserting your card into a machine. Contactless transactions are made through your phone, card, watch, key fob, bracelet, or other enabled items.

However, only NFC-enabled cards allow for no-touch transactions. Your smartphone is already equipped with this chip for services like Apple Pay and Google Pay. Most banking cards are being issued with the NFC chip as the U.S. begins to migrate towards this new tap-to-pay technology. If you have noticed the sideways wifi symbol on your card, this is an indication that your card has the tap-to-pay functionality.

nfc technology

Technology Behind Contactless Payment

Contactless payments are possible through near-field communication (NFC). Both the card and card reader must be equipped with this in order for the transaction to work.

This technology allows the chip in your card – or phone or smart-watch – to emit secure, short-range radio waves that communicate with the point-of-sale (POS) terminal. Purchases made using this method are as simple as holding your payment method near the POS terminal.

The History of Contactless Payment

Surprisingly enough, contactless payment has been around for decades. The first example was in Seoul, South Korea in 1995 when the transit system began to use contactless bus passes.

Since then, and especially more recently, the method has exponentially grown.

The United States is slightly slower than other countries in adopting new transaction methods. However, most retailers have moved over to NFC-capable terminals and almost all major banks in America offer ways to make contactless payments.

As the world is trying to socially distance and stay healthy, contactless payment is gaining more popularity. Mastercard reported that there was an uptick of over forty percent in contactless payments in 2020.

However, being creatures of habit, many people still have trouble trusting this new method of payment versus the traditional way of paying.

This brings us to the question – is contactless payment safe?

In short, yes.

How Safe is Contactless Payment?

Many people fear that sending data wirelessly is easily intercepted. This is certainly not the case with contactless payment. For all intents and purposes, it’s just as safe as using the chip reader.

Any time information is shared between a payment method and POS terminal, the data is encrypted. Furthermore, to ensure the process is even safer, the transaction uses a one-time code that has no value outside of that transaction.

Meaning even if someone was able to get the information from the two inches between your payment and the card reader, the information would be essentially useless.

Compared to the old magnetic strip technology, contactless payment is exponentially safer. With magnetic strips, people could steal and clone the data on your card and make a completely new one, leading to fraud. This process is not possible with NFC/EMV chips.

is contactless payment safe

Why Should I Use Contactless Payment?

Many people are coming around to contactless. In fact, one in three card payments is now contactless. But if you’re still not convinced, consider these advantages for contactless payments.

It’s Secure

Security is (and should be) a top priority for most businesses, especially in the fintech industry. NFC technology certainly helps make transactions as secure as possible. As the transaction goes through, all data is encrypted and uses a unique, one-time code, making it nearly impossible to clone the data. Secondly, the card or mobile device must be within centimeters of the POS terminal for tap-to-pay to work. Thirdly, the transaction is verified by using two-factor authentication or fingerprint when using your mobile device.

It’s Fast

Contactless payments don’t require a Personal Identification Number (PIN). It’s as simple as holding your card or phone up to the reader – and you’re done. Much faster compared to inserting a card in the chip reader, declining cash back, then entering your PIN – all to wait fifteen seconds for the payment to go through.

It’s Contact-Free

This is a given – but it can be understated. We’re all trying to stay safe and healthy. The pandemic has made many realize how dirty public surfaces can be. Yes, companies are taking extra measures to ensure everything is cleaned and sanitized – but this doesn’t eliminate the risk. With contactless payments, you don’t need to touch the reader that potentially hundreds of others already have.

It’s Convenient

Contactless doesn’t have to be done with a debit or credit card. Think about Apple Pay, Google Pay, or Samsung Pay – these are virtual wallets that eliminate the need to carry around a physical wallet. Say you’re going to the beach or on a hike – you don’t want to lose your wallet, but may want to buy something on your outing. Using a contactless payment method makes it possible to pay without physically carrying your card as long as you have your mobile phone or NFC-enabled bracelet or key fob like those offered at Marygold & Co.

tap and pay

Risks Of Contactless Payments

Like anything, contactless payments have risks, but NFC technology is so advanced it is less susceptible to hackers than traditional card technology and improvements are adding layers of security to protect user data. However, the impossibility of interception can’t be completely guaranteed:

Because there is no PIN entered when using contactless, whoever is physically holding the card is able to make transactions. However, there are normally lower limits set on the card for extra protection. Enhanced security controls, like Marygold & Co. offers, will enable you to manage your own limits and turn on/off contactless payment capabilities. Keep track of your card and freeze it anytime one goes missing.

How to Get Started

Most banks will offer forms of contactless payment, be it on your smartphone or your credit card.

Start by using Marygold & Co. for all your financial needs and transactions.