“Take calculated risks. That is quite different from being rash.”
– George S. Patton
A Bear Market. This is when stock prices fall rapidly and as a result, so do your investment account values. If you watch financial news, this is a term that is often used when investors are starting to get nervous or downright scared.
That’s because bear markets can feel a lot like a riptide. Suddenly and unexpectedly, a lethal force catches hold of us, pulling us with irresistible strength and breathtaking speed…
Exactly OPPOSITE of where we want to go.
The threat leads to panic, and the panic leads to our instincts kicking in, which leads to…uh oh!
Unless, of course, you know ahead of time how to react. In that case, it’s our preparation that kicks in and ultimately saves the day.
Here are four steps to keep handy the next time there’s a bear market.
#1. Don’t Panic.
In a bear market, it’s almost impossible not to have a strong emotional reaction. Nobody, not even the most seasoned and rational investor, enjoys watching their accounts plummet.
All decisions are driven by our emotions, but the question is…which emotions?
The worst decisions are usually made from negative emotions. I’ve seen someone who felt he needed to sell everything and go to cash because he was responsible for their family’s well-being.
Another said she’d heard on the news to get out of the market.
Maybe the worst was the investor that sold a diversified portfolio after it lost 20%….
To turn around and buy one stock! In their mind, they had to get really aggressive in order to make up for their losses.
Don’t get caught in an emotional trap. Instead, take a look at the context of the situation.
Ask yourself, have stock prices been rising consistently up to this point? Is this loss really going to set me back, or is it just taking away some of the gains I’ve been enjoying? If the market is overpriced, chances are this is just a necessary correction before things go back to normal.
Corrections, even the necessary kind, are still nerve-racking, but don’t allow previous negative experiences to cloud your judgement. Stay calm, and stay the course.
If, however, the bear market seems to be something more than a correction, you still shouldn’t panic—there may be opportunities ahead.
#2. Avoid selling stocks at a loss.
In most cases, selling a stock after a steep downturn does not make sense.
Of course, even in a bull market (when prices are going up)—any individual company could end up changing course for the negative…in which case cutting your losses could be the best thing to do.
But what if the company is still sound, and simply experiencing a temporary negative period…along with most other companies in the market? Then it usually does not make sense to sell.
The more important question is…does your portfolio have enough conservative assets to give you time to ride out market losses and decrease the chance that you have to sell something at a loss?
Creating a diversified portfolio is key, especially when it comes to a market downturn.
When we are working with clients who are at or near retirement, the first thing we do is account for how they will receive income. But not just how they will get it now—how they will get it if, and when, the market goes down.
In a nutshell, we figure out how much they spend every year and then put 7 to 10 years’ worth of expenses into conservative assets. That way when a correction comes, they can hold tight for a decade waiting for the marketing to come back up without have to sell anything for a loss.
We call this the Money Bucket Harvester strategy, and if you’re interested in learning more, let’s set up a free Confidence Booster Call where I can walk you through what this would look like in your portfolio.
#3. Recognize potential buying opportunities.
Bear markets inevitably prove to be the best time to buy stocks…that is, in hindsight. While nothing can guarantee success, buying low and holding until the market recovers can be a winning strategy.
So why don’t more people buy stocks during bear markets?
For one thing, investors often pay a lot more attention to what other people are doing, rather than assessing the situation for themselves. So when people start running for the exits, many investors don’t think twice—they just join the stampede!
But it’s even deeper than that. There’s an old saying that goes: “When I have the price I don’t have the conviction, and when I have the conviction, I don’t have the price.”
Psychologically, buying into a downturn is a very difficult thing to do! It goes against all of our instincts and better judgement…even if we know our instincts will only hurt us in the end.
The solution is to take the decision out of your own hands. If you’re ok with the added risk, make a commitment while markets are doing well to buy more when prices drop. Like Benjamin Hardy says in Willpower Doesn’t Work:
“Commitment means you build external defense systems around your goals. Your internal resolve, naked to an undefended and opposing environment is not commitment.”
That doesn’t mean you have to buy in all at once.
Move into the market at different times as the market continues to drop. Down 15%…buy some. Down 20%…buy some more. Even down 30%…keep buying.
A bear market is a sign that stocks are “on sale.” Why not take advantage and buy? Talk about turning lemons into lemonade!
#4. Reassess your risk.
Bear markets separate the risk takers from everyone else.
When it comes to diet and exercise, I’m on the fanatical side. I’m willing to take risks and make sacrifices to achieve my goals. But you know what? Most people aren’t.
Does that mean they should simply throw in the towel?
Of course not!
So what I tell people about investing is the same as what I tell them about diet and exercise…
Follow the plan that you’re going to follow.
In other words, having a plan that you feel confident you’ll be able to stick to is WAY better than a plan that looks good on paper, but in reality is too far outside your comfort zone to be effective.
In fact, the difficulty in sticking to it will cause you more harm than good.
If you find yourself in that situation in the next bear market, that’s a good sign you don’t have the right plan. Now DON’T move more conservative until the market has recovered…
But DO remember how you felt, and when the market recovers, take advantage to adjust your plan.
“Many times, the thought of fear itself is greater than what it is we fear.”
– Idowu Koyenikan
Hopefully you will be ready for the next downturn. I don’t know when it will happen. I just know it will.
CLICK HERE to become an Insider! Join my Email Insider Group to receive weekly tips and tricks on finance, education, home buying, insurance, Social Security and everything in between. Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director United Capital Financial Advisers, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances.
© Byron Ellis