Imagine you’re hiking in the Alaskan wilderness with a friend, and not far away, you spot two little cubs heading toward you both. Your heart starts pounding, wondering where momma bear is until you get startled by the sight of an angry grizzly ready to pounce the two of you to a pulp. Freaked out, you run as fast as you can in the other direction while your friend remains calm and opts to play dead instead.
Who do you think will survive this frightening encounter? If you say it’s you, think again.
That’s when the skill of staying calm and collected in scary situations gets handy. It’s the same skill you need to survive (and possibly thrive) from a fierce “bear market” attack against your investments.
What is a bear market?
The stock market goes up and down in recurring cycles. The market goes up when investors put their money into stocks. It falls when they take money out. Various economic, social and political factors influence how investors behave.
By definition, a bear market is any 20% or more stock market decline from previous highs. The S&P 500 peaked at 4,793 on Jan. 3rd close. By last Thursday’s close, it was 3,666— down 23.6% since.
When the market goes haywire, many investors panic and bail out of stocks, turning temporary paper losses into permanent wealth-crushing losses. They’re better off playing dead like your friend who dodged being eaten alive by simply doing nothing.
The opposite of a bear market is a bull market, probably because bulls don’t hibernate like scared investors who stop contributing to their 401Ks when stocks are in a freefall.
Low-interest rates have long encouraged investors to put money in stocks fueling the longest bull market in recent memory. Now the Fed is raising interest rates to combat high inflation; the market is plummeting. It isn’t hard to explain at all.
You can be eaten alive running from a bear market
When you’re relatively young and several years from retirement, you might feel you can outrun the bear market by selling your stock positions and investing later when the market bottoms out. Be forewarned, it is very difficult to time the market.
You need to be right twice:
- When to sell: Is it the right time to sell? What if the market rebounds tomorrow? Keep in mind that the strongest days usually happen just a few days from the worst days.
- When to buy: It’s great if it goes down some more. But If you sold and the market starts climbing, it’s very painful to get back in.
Nobody, I repeat, NOBODY can time the market. Fact is, missing the best days can severely impact your returns. You also risk paying early redemption fees and deferred sales charges (check your mutual fund prospectus).
Just ask investors who sold at the bottom of the bear market in March of 2020. Ouch!
To survive you need to stay calm and collected
A Fidelity study supposedly reviewed the performance of its customers from 2003 to 2013, and the conclusion was that the best-performing investors are dead people. It turned out that the study was a hoax.
But even then, the conclusion isn’t wrong. Think about it, over the long run, stocks aren’t risky— the overall trend is upward. People are risky. Investing based on emotions has caused people to buy high and sell low. To quote
the NRA, “Stocks don’t kill portfolios, people kill their own portfolios.”
The best way to alleviate your fear is knowledge. Here are some facts about bear markets:
- Bear markets are normal. There have been 26 bear markets in the S&P 500 Index since 1928. However, there have also been 27 bull markets—and stocks have risen significantly over the long term.
- Bear markets tend to be short-lived. The average length of a bear market is 289 days or about 9.6 months. That’s significantly shorter than the average length of a bull market, which is 991 days or 2.7 years.
- They’re a great buying opportunity. Stocks lose 36% on average in a bear market. In contrast, stocks gain an average of 114% during a bull market. If you invest for the long haul, you’ll win!
You see, when it comes to the S&P 500, all declines are temporary. There’s simply no precedent for permanent losses except for those who sold.
What to do in a bear market
Instead of being fearful, you should embrace what you can’t control, bear markets included. Stop paying attention to the news if it affects your investing decisions. Focus your energy on things that you have control over:
- Beef up your emergency fund. Not all bear markets lead to a recession, but it pays to be prepared.
- Review your goals and asset allocation; rebalance accordingly.
- Invest even more while market prices are down
- Stay the course and don’t panic
You may feel you’re not making any progress, but your 401K contributions (and dividend reinvestments) are buying more shares in a bear market. You’re like a flywheel storing kinetic energy ready to catapult when the market sentiment reverses its course.
Bull markets may make you feel rich, but how you react during bear markets is what will ultimately make you thrive.