By: Devan Robinson
“You make most of your money in a bear market, you just don’t realize it at the time.” - Shelby Cullom Davis
As I am writing the stock market is likely entering a bear market this week. I wanted to provide some thoughts on bear markets and what they mean for investors.
What is a bear market?
A market correction is defined as a decline of 10-20% and a bear market is 20%+. Typically investors will see 1-2 corrections per year and one bear market every 2-4 years. They are an unpleasant, but normal, feature of investing. Every bear market is unique but they all end the same. This latest bear was triggered by the uncertainty surrounding coronavirus and an oil-market collapse as Russia and Saudi Arabia deepen their price war.
If you have been an investor the past few years you have been through this before. We had a bear market at the end of 2018 as the US-China trade war flared up. If you are new to this - welcome to the hard part of investing. It will pass.
I am certainly no expert on public health. What I do know is bear markets and how to navigate them.
More thoughts on COVID-19
First off - it's okay to be anxious and worried about COVID-19. In the coming weeks it is likely to gain momentum in the United States and the headlines will be stark and worrisome. Like a fever, the feeling will get worse before it suddenly gets better (bear markets feels this way too). Schools close, political rallies cancelled, concerts cancelled, economic stimulus, etc. No one can say how it will all develop (least of all myself) but it seems likely our lives will be disrupted in one way or another.
What I know for certain is that it is okay to be anxious. This is nothing our country can't tackle - we have faced bigger challenges. Free people are free to make mistakes but also free to do wonderful things. Asian countries, where this began, are stamping it out effectively. We will too.
Back to bear markets
As we've discussed before, volatility is a feature of markets and life as an investor. The chart below (courtesy of Dimensional) shows us the intra-year gains and declines throughout the years.
Persisting through the swings are why disciplined investors earn the phenomenal returns of the markets. The headaches of the swings are the price of admission for the returns. Without the volatility you would earn the return of a bank account.
In the midst of the bear market heartache there is a silver-lining. The best market returns follow bear markets.
Like all of the bear markets prior to this one it will pass and the patient and disciplined investors will be rewarded for their headaches.
Bear market tips
Having done this a time or two here are some tips for dealing with a bear market.
Do not stress about the day-to-day swings.
The hallmark of a bear market is volatility and it will stick around for a bit. 1,000 points up, 1,100 points down, 1,200 points up, and so on and so forth. The traders trading the short-term environment are playing a different game than you and you do not need to participate. For long-term investors these daily swings do not matter that much. The day-to-day swings of the 2018 bear market didn't matter to the long-term investor and neither do these. Most of it is noise.
Scrutinize your financial media and cable news.
Your high school history teacher taught you to pick your information sources carefully - they were right. The job of financial and cable media is to keep you watching commercials and clicking through ads. Cable news gets their best ratings during periods of turmoil. The job of cable media is to keep you emotional, not informed.
In financial media they will bring out every goof with a newsletter that claimed to call this bear market. Rarely do these folks have any assets they manage. It is much better to listen to the experts who have a actual stake in markets and investor outcomes.
Bear markets can bring out a sense of urgency in everyone. It can make you feel like you are supposed to do something. Resist the urge to make sweeping changes to your portfolio. If you are working with a fiduciary advisor your portfolio was designed to handle bear-markets. You have a plan in place that expects bear markets. Sit back and reinvest your dividends at great prices.
This time isn't different.
Each bear market is unique and feels apocalyptic. But like all of the bear markets before it this one will be surmounted. Markets and capitalism are very good at tackling challenges - it's what we do best. Even at the height of a global pandemic I will still be putting gas in my car, shopping online, and most of all my son will HAVE TO HAVE his McDonald's Happy Meal. The economy and life will move forward despite all those who say it won't.
Give yourself a break.
If you have been entranced by the headlines give yourself permission to take a break. This tip is important. The news is exhausting and will not help you. The single most successful investor I have ever known once told me he doesn't watch the news. If something was truly important he would learn it throughout his daily life. He said if he didn't hear it through the grapevine it probably wasn't worth his mental energy. The older I get the more I realize the wisdom in his words. He is really good at what he does.
Give your mind a rest and enjoy life.
"History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable." - Shelby M.C. Davis
The foregoing content reflects the opinions of Fairlead Financial Group LLC and is subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful, or that markets will recover or react as they have in the past.