How To Survive A Bear Attack
My 11-year-old daughter, who is quite industrious and forward thinking, announced recently her intention to cultivate a set of friends for camping who are not particularly speedy. “When a bear attacks, I don’t need to be as quick as the bear, I just need to be faster than my slowest friend” she proclaimed only half-jokingly.
Investors have been waiting anxiously for the next bear market (20%+ decline) which seems to have been ‘around the corner’ for nearly 2 years. We’ve had several close calls for the major indices, declines in the 5% - 10 % range (with plenty of formerly high flying stocks like Zoom, Peloton and the like having cratered 60%, 70% or more), but no full-fledged bear market for quite some time. Truth be told, the last one we had – associated with the onslaught of the pandemic – was so short-lived and based on such an unforeseeable, literally once a century type event, that it actually received somewhat of a ‘pass’ in the annals of bear markets. US stocks took a mere 36 days to fall over 20%, and recorded the fastest 30% decline on record. The rebound, however, was equally rapid, the market recouping its losses within months. That quick recovery combined with last year’s unusual pattern of stocks declining a mere 5% or so before swiftly recovering is more the exception than the norm. The average bear market lasts closer to 9 or 10 months. Bear markets occur for a variety of reasons, ones in the last several decades emanating from events like the pandemic of 2020, the terrorist events of 9/11, the overleveraging of the housing market and subsequent bubble bursting (and recession) of 2007-2008, and sometimes for no obvious reason at all like the crash of October 1987.
So, if bear attacks are not predictable in terms of their timing and duration, how should an investor ensure he is prepared for the next one? Here are some tips:
- Understand, before you invest a penny, that stocks can decline in the near term for reasons known and unknown. Over time (e.g. 3-5+ years), a well-diversified portfolio of stocks tends to go up. As such, prepare yourself accordingly, and if you don’t think you can handle such inevitable drops emotionally or financially, then don’t invest in stocks – or better yet work with an investment professional who can help you overcome these fears and set forth a plan that will get you through the ups and downs to a better financial tomorrow.
- Always allocate capital you will need in the next couple years to something other than stocks (cash, short term bonds, etc.). Do this regardless as to whether we are in a bear market, bull market, or sideways market. Remember, there is no bell announcing when the music will (temporarily) stop, thus be disciplined.
- Just as though you will not be able to predict, let alone time, when the next bear market will occur (and nor do you need to in order to achieve your various financial/investing goals), you will not be able to predict nor time the rebound. In the case of the recent 2020 bear market, the 50 days following the March low represented the best 50-day market rally in history. If you sold in a panic this Spring and waited for things to become ‘clear’, you sold low and will invariably buy high. Compare that to someone who ignored even the fastest bear market in history; she is doing just fine and got to avoid all the stress along the way.
- Resist looking at your stocks/the market/headlines day to day. If you have a sound plan in place, then other for ‘entertainment’ purposes (and having your blood pressure rise is hardly a great form of entertainment), there is no need to be checking in daily. I am pretty confident that there are much better, less stress-inducing forms of entertainment. More to the point, when we are looking at something constantly, especially if it is going against us, we often feel the need to ‘do something’ (this is typically a psychological need to be in control). That something is very likely to not be in our best long term financial interest, no matter how much it satisfies a short-term itch.
- As I wrote about in a prior article (The Stair Way to Financial Heaven), in exchange for potentially benefiting from the superior long terms returns equities can offer, you need to be able to withstand some short term ups and downs along the journey. Accept this. Prepare for this. Don’t fight this or pretend these realities don’t apply to you. At a minimum ignore these fluctuations for your long-term money, ideally take advantage of them through regular market contributions (either through a retirement account and/or reinvested dividends) leading to powerful dollar cost averaging. Be honest with yourself – if you feel you don’t have the emotional fortitude to resist making bad decisions (and most people do not have this discipline if working just on their own), then partner with an investment professional with decades of experience who can help you navigate choppy market waters.
Article by Scott Kyle