September 21, 2020

My 10 year old daughter, who is quite industrious and forward thinking, announced yesterday 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 across the U.S. were just attacked by the fastest bear market in history, a mere 22 trading days from highs to a 30% thrashing. And here you are, able to tell the tale of successfully surviving the most viscous, high-speed bear attack in history.

What can we learn from this and how can we apply it to the next one which will attack at some point; we just don't know the when or why. For some context, since the end of World War II, bear markets, or declines of 20% plus, have occurred about once every 5 years on average. It is important to note that when bear markets begin, no red light turns on. No one announces the proverbial music is about to stop so you should stop dancing and run for the nearest chair (or exit). Stock markets tend to be forward looking, so stock prices today may reflect what the market (read: all investors combined) is sniffing out well into the future.

Sometimes large market declines occur for clear reasons like the terrorist events surrounding 9/11. In other cases, the basis for material declines is debated for years, witness the 1987 crash. While not (yet) a bear market, is there any one clear factor investors can point to as to why tech stocks all of a sudden stopped their seemingly never-ending, week after week ascent into early September, only to drop precipitously in the ensuing days? Just as there was no clear reason for the relentless up days with nary a break, so too is there no obvious single indicator for why top quality companies such as AAPL have dropped 20% plus (its own bear market) in just a handful of trading days. Sometimes selling begets selling – it becomes self-fulfilling. To carry through the musical chairs example, from time to time the song playing is longer than Eric Clapton's Layla, everyone is happy the party is lasting so long, but those on the margin are getting a bit nervous. Suddenly, someone decides they've had enough (as in sits down), this begets others sitting down, and before you know it there is a mad rush for chairs…and then nothing but eerie silence. That is how most bear markets go. Six months later you hear the news that the DJ had a heart attack (in economic terms, a recession was forming) but this is long after the fact, and in reality, by the time you hear the real reason, the music is back on and the bull market in full force.

So how does one survive a bear attack, let alone the fastest bear in history – and ensure you are prepared for the next one?

  • 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.
  • 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, 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.