Bear Markets: The Bane of Every Investor
What exactly is a “bane”? It’s a cause of great distress or annoyance. For an investor, it manifests as financial distress and annoyance. Some investors tell me that they don’t worry about bear markets because they are long-term oriented, and the market always recovers from a bear market. True. But at what cost?
The cost is much higher than most investors realize, because most investors measure cost in dollar terms. But the real cost of bear markets isn’t in dollar terms. It’s in lost purchasing power and lost time that can never be recovered.
For example, after the infamous crash of 1929 and the Great Depression that followed, it took 26 years for the market to regain its’ old high-water mark. After the 1973-74 bear market it took 23 years for the market to regain its’ previous high. After the tech bubble burst in 2000, it took 14 years to get back to the old high.
The $64,000 Question
Are you o.k. with the prospect of sitting still through a recessionary period, remaining fully invested in the stock market, knowing that it might take you 20 years or more to get back to even? I don’t know many who would answer yes to this question. The problem is that most investors aren’t aware of the real damage to their savings that come from recession-linked bear markets.
They have been told by their financial adviser, the financial media, and even Warren Buffett that the best strategy is to buy and hold a diversified portfolio, and ignore the gyrations of the market. Does that make sense to you?
Perhaps if you are looking for the most simple, easy to manage strategy it makes perfect sense. Or perhaps you think of tinkering with your investments just slightly more pleasant than a root canal. I understand those viewpoints. But for those who want to protect their savings and avoid spending years wandering in the wilderness while the market regains its’ footing, there is a better way. And it doesn’t require much time or effort.
Plan B. Every Investor’s Best Friend
Plan B is just my shorthand for a contingency plan. Every investor needs a contingency plan. This is a predetermined set of steps to take when things begin to fall apart in the market. Very few investors have a contingency plan. They rely on their gut instincts to tell them what to do. This is a very poor way to protect your savings. Invariably you will sell too late, and buy back in too late. This will have the effect of turning what could be just a bruise into a multiple fracture.
I will have more to say about contingency planning in the next installment of this series, but for now you should give some thought to how you might handle the coming recession and bear market. If you think you can just skate by it without much damage, consider the damage done by previous bear markets. If you have a contingency plan in place, update it.
The beauty of a contingency plan is that you write it when your brain is fully rational. If you wait until the stock market is in the process of a big drop, your rational brain will be AWOL and your decisions will be mostly driven by fear. That’s not a good way to manage risk.
In part 2 of Bear Markets
I will dissect the 4 worst bear markets of all time, and look for clues about how one could have avoided most of the damage.
Read more articles on bear markets like this one.
Thank you for writing this series. I’m at an age where I probably don’t have 20 years to recover from a recession so this thought process is very valuable to me. Steve