Bear Markets Test our Mettle and Actions Taken Now Can Have Long Lasting Effects
By Jon Aldrich
Ok, it has happened. As of this writing on Friday afternoon, the S & P 500 has dropped by 20% from it’s highs which is the generally accepted definition of a bear market. You can bet your bottom dollar that the media is going to have a field day with this over the weekend and beyond and you will see this trumpeted everywhere. What investors do now and in the coming weeks can really shape their futures. This is where the “Rubber Meets the Road”.
So, what do I mean by “what investors do in the coming weeks can really shape their future”? Well, giving in to panic is probably the number 1 thing that investors generally do when markets hit the inevitable rough patches that come along surprisingly more than we think, but more on that later. It really boils down to what you do in “Bear” markets can really affect you more than what you do in “Bull” markets. In “Bull” markets, everyone is a genius.
First, let’s discuss “Bear” markets, they come along a lot more often than you think. In fact, historically, we can expect a bear market (>20% drop from the highs) about once every 4 years. Now, we have had 3 of these “bear” markets in the last 4 years. At the end of 2018, during the COVID crash in 2020, and, of course, what we are experiencing currently. The chart below by Charlie Biello of Compound Advisors lists them all out for us, going back to the Great Depression.
Investors that panic sell during the worst of the “Bear” markets really depress their investment returns going forward as more often than not, they don’t know when to get back into the market and miss out on the recovery which many times starts when things look the bleakest.
I frequently mention in my meetings with clients that we are going to experience many “Bull” and “Bear” markets in our lifetimes. That is why we want to have a plan in place and a solid asset allocation for each investor’s individual situation that can weather these episodes and will produce long-term results to meet our long-term needs.
I am not going to lie to you, “Bear” markets are truly no fun for the vast majority of us that have significant lifetime savings in the stock and bond markets. You are going to hear all kinds of dire predictions on T.V, radio and what you read in papers and on the internet. Many are going to lay out excellent cases about why the world is ending and why you should panic. As, I have mentioned many times over the years, this is a media feeding frenzy as they sell more advertising dollars when there is a crisis and if they can “enhance” this crisis with their scary graphics and guests that come on that have been calling for crashes their whole lifetime, but have been wrong the entire time the markets were doing well. Remember, markets generally go up over time, so those that are calling crashes every year have cost investors many more dollars being wrong over the years, then the occasional times we are in a bad market and our portfolio’s sustain losses.
We should look at things in perspective. Below is a chart of the iShares Core Growth Allocation Fund (AOR). It approximates a roughly 60% stock/40% Bond portfolio a standard portfolio for many investors. Since the beginning of 2017, even after the rout so far in 2022, it is up a little over 38% total. If you had fallen asleep at the beginning of 2017 and woke up today, not knowing all that has occurred in the time between, would you be unhappy with the results? Probably not. Consider that over the same time, if you had kept your money entirely in a money market fund at the bank it would be up a measly 4.3%, so after inflation, you would be quite a ways in the hole.
What are some other things you can be doing during this tumultuous time?
Tax Harvesting – This is the process of selling positions with losses, reinvesting immediately in a very similar security and banking the capital losses generated to offset future capital gains when other positions are sold with a gain. You can only do this in taxable accounts so it is not applicable to IRA’s or 401k’s.
Roth Conversions – This doesn’t apply to everyone, but for those that it does, doing Roth conversions from a traditional IRA when prices are lower and paying less income tax on the conversion, allows the converted amount to the Roth IRA to grow tax free forever at a lower starting cost. This can result in significant tax savings down the road.
Quit Reading or Watching so Much Negative News – Stop reading, or cut down on reading the news, website or T.V. programs that are just havens for enhancing the negative news.
Stop Checking on Your Portfolio Balance so Often – For many people, the worse the market gets, the more they go online to check how much they have lost. This can really accentuate the emotions they are having and can increase the odds they will make panic decisions that will end up costing them. You may want to consider not going online so much to see the bad news, or for those that are already not going online, don’t open your monthly statements when they arrive.
Do Other Things to Keep Your Mind off The Markets – Find other things to occupy your time. Get out and enjoy the outdoors and the better weather we are having. Dig into your hobbies or other interests. This can all be really beneficial for your well-being.
Consider Investing Extra Cash You May Have – You might start thinking about putting some extra cash you may have to work in the markets before too long. Why is it, that everyone loves discount sales when they go to the store, but when stocks and bonds are on sale, no one wants to buy?
Yes, this can be a stressful time for many of us, but there are things that you can do to help alleviate the situation as mentioned above. The important things are to try to take care of yourself, keep stress low and spend your time on other endeavors. We will get through this as we have got through all the other times on that list above. The lousy market may last a while, so we have to learn to live with it. Also, don’t forget that today’s Bear market sets the stage for higher returns in the future.