How to React to a Bear Market

Investing
If you’re an investor who pays attention to market news, you probably know that the market didn’t do you many favors toward the end of 2018 (if you’re a long-term investor who doesn’t really pay attention to market news, good for you).

Throughout 2016, 2017, and most of 2018, many people were lulled to sleep and forgot that the market doesn’t always go up. No one likes to see their accounts decrease in value, but for the long-term investor, it’s an important reminder that these things are not unprecedented; actually, they happen quite often.

Still, by many metrics, we haven’t really faced a “bear market” since the infamous Great Financial Crisis a decade ago. A bear market is usually defined as a 20% decrease from previous highs in the market. Depending on who you ask or how you measure it, the most recent decline at the end of 2018 was right around that -20% mark.

The truth is, the number itself doesn’t really matter  – it felt like a bear market. And when something feels bad, we often want to react in some way. Makes sense, right? Something is causing me pain, so I want to stop the pain. That’s fair, but often times our gut reactions are not the most appropriate reactions for long-term investing success.

With that being said, let’s take a look at some DOs and DON’Ts that can help you navigate this “bear market” and make the correct long-term decisions:

 

DO…

…nothing

Simply put, if you’re a long-term investor, the short-term fluctuations of the market should not matter to you. In most cases, the best reaction is to have no reaction at all. Just keep on doing what you’ve been doing. Easier said than done of course, but try to keep that in mind when you check your year-end statements and feel uneasy.

 

…realize that this is a function of markets

These things happen from time to time. It is part of the risk involved with investing. For example, in late 2015 / early 2016, the S&P 500 was down about 15% from its previous highs. Even in early 2018, the S&P 500 was down about 10%. These are both recent, but most people have already forgotten because the market rebounded in short order.

Ben Carlson just wrote about several other bear markets that are rarely remembered. The main takeaway is that while these probably seemed awful at the time, in the grand scheme of things, they’re just blips on the radar, and if you could manage to stay the course during them, you’d have wound up doing just fine.

 

…have an appropriate plan beforehand

If you invest at all, you ought to have an investment plan that helps guide your decisions. A good investment plan sets expectations from the get-go. You know what you’re invested in, why it makes sense for you, and how to expect your investments to react to different market conditions.

It will also help you determine how aggressively you should be invested, and when to make adjustments. For example, your plan might tell you that since stocks have fallen, you actually don’t have enough money in stocks, and you should buy more. This approach (we call it “rebalancing”) might go against your gut, but it is dictated by goals set in advance, and prevents emotional overactions.

Making decisions based on your personal investment plan are much more viable (and easier, quite frankly) than making decisions based on the fluctuations of the market.

 

DON’T…

…assume that the market is doomed

Your gut might tell you this increased volatility in the market means we’re on the brink of a giant recession. This could certainly be true. However, there is no way of knowing or predicting this. What we do know is that markets go up more often than they go down, and over time staying invested has led to pretty great results.

If your instincts have been telling you to sell your stocks, remind yourself:

• Stocks you own are less risky than they were a few months ago (they were riskier when the prices were high since you had more to lose).
• Stocks are currently discounted by about 20%, and if you’re saving money on a regular basis (i.e. 401k deposits) you’re buying stocks while they are on sale.
• When current stock prices go down, your future expected return actually goes up (things tend to balance out in the long run; this is known as “reversion to the mean”).

 

…try to time the market

This is a fool’s game. In order to get this right, you have to first correctly anticipate when the market is at a peak, then get out. You then also must correctly anticipate when the market has bottomed out, then get back in. Even if you correctly predict a market decline, you might be a month or two off, and could miss out on significant gains during that time.

Many thought the 10% decline earlier in 2018 was the start of a huge decline. They sold, locked in their losses, and missed out on several months of gains. Essentially, market timing is convincing yourself that you have mastered the ebbs and flows of the stock market, and you can accurately predict the future. Good luck.

 

…focus on the headlines

The goal of a headline is to grab your attention so you read more. Headlines are not intended to be decision-making tools. There’s nothing wrong knowing what’s going on in the world, but just remember headlines are short-term by nature. They focus on what’s going on this instant. For the long-term investor, “this instant” is not significant. Stay informed, but keep your focus on the long-term when you make decisions.


Of course, that’s all easier said than done. If you’re worried about bear markets or the next downturn, give us a call. We can’t tell you exactly what’s going to happen in the future, but we can help you make sure you’ve got the right plan in place to get through whatever the future holds.

Thanks for reading!

About the Author: Joshua Bentz

Joshua Bentz, CFP®, Wealth Advisor, helps clients organize and simplify their financial lives by providing comprehensive, personal financial planning. As a Wealth Advisor, Josh provides comprehensive financial planning for clients. He enjoys getting to know individuals and families so he can give specific, meaningful advice. He believes in being a fiduciary and doing what is in the best interest of clients.