Dave Nadig talks about an impending bear market

This week ETFs Edge host Bob Pisani spoke with VettaFi financial futurist Dave Nadig and Gerard O’Reilly of Dimensional Fund Advisors about what long-term investors should do with the S&P 500 approaching bear market territory.

As for what history dictates and what O’Reilly tells investors, “It’s important to set expectations correctly, and the right expectation for investing in the markets is that they are risky.” It’s important to stay disciplined, stay well-diversified and have the right mix of stocks, cash and bonds, especially in these volatile times.

There are ways to make things riskier, O’Reilly noted, and that’s by sacrificing diversification, chasing fads, or sacrificing discipline for panic when markets are volatile. All of these things will make time stop working for the investor, so it is very important to hold the line with patience and understanding.

Looking at the investment thesis and seeing what to expect based on past research, for Nadig, given all that’s going on, it’s hard not to be excited about things based on international values . The international dimensional value ETFs (DFIV) is a fund to consider in this regard, as it performs well and is about the best international or value fund you can find right now.

“It’s a win, given the markets we’ve seen,” Nadig added.

With this in mind, Nadig spoke about the key points raised by O’Reilly regarding diversification and cost control being the secret ingredient to managing a bear market. Investors are turning to lower-cost products, which can sometimes mean switching to a ETFs get out of a mutual fund and move towards broad diversification. These are the two things that work long term and two of the things investors can actually control.

Given what’s to come, as O’Reilly explained, a sharp downturn may signal that a recession is in store for the real economy. This isn’t always the case, but that doesn’t mean investors should expect future declines. It can happen, but there are more chances that positive returns will be expected.

Essentially, a negative year does not imply another negative year. With that in mind, O’Reilly also highlighted good inflation versus bad inflation, noting that the key things to keep in mind are that investors can either overshoot it or hedge it. Stocks and bonds tend to offer positive real rates of return, even during periods of high inflation. Buying products indexed to inflation allows investors to hedge it.

“You can plan for unexpected inflation,” O’Reilly said. “You just can’t predict when it’s going to happen.”

Nadig noted that it is important to recognize that the market is affected by several types of inflation at once. Everything from food and energy inflation comes from war, and there will also be significant supply chain issues from Asia for the foreseeable future. These factors make it difficult to achieve a point solution that will protect investors from all of these potential sources.

Says Nadig, “I repeat, a good, well-diversified portfolio with low-cost alternatives is probably your best bet.”

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