By bear market standards, the recent sell-off was super-fast. It took 16 days for the Standard & Poor’s 500 stock index to fall 20%, the quickest transition from bull to bear ever. But the size of the drop, at least so far, has been below average. At the bear market low on March 23, the broad market gauge was down about 34%, shy of the 40% dip suffered in bears since 1929, according to S&P Dow Jones Indices.
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Still, this bear market, like all the prior ones, has been unsettling. Nobody feels good about losing a third of their stock portfolio in a three-week span. The good news? You can survive a bear market – if you stick to the basic survival guide that Wall Street periodically pulls from the bookcase when the bear initiates its attack on your money.
What follows is a bear market survival guide that highlights major mistakes to avoid:
Don’t try to call the low
Where’s the bottom? That catchphrase is as popular on Wall Street as Wendy’s “Where’s the beef?” ad was during the burger wars in the ’80s.
There’s just one problem: it’s nearly impossible to call a market low, says Jerry Braakman, chief investment officer of First American Trust.
“One of the biggest money mistakes that investors make in a bear market is thinking they can pick the bottom,” Braakman says.
Bear markets, he points out, are not quick events. (They typically last 21 months, S&P Dow Jones Indices says.)
Bears have frighteningly high volatility. (In a short span in March, the S&P 500 saw average daily moves of more than 5% versus average swings of less than 1% last year.)
It’s not uncommon for big rallies to occur in bear markets before reaching a final low. (The market saw several 20% rebounds during the dot-com stock bear in 2000 and the financial crisis in 2008, Braakman points out. That script could be playing out again, as the S&P’s rebound topped 27% April 14.)
Bottoms often take months to form, Braakman says. It’s not uncommon for the S&P 500 to rally before going back down to “test” the old lows. Often, new lower lows are made.
In the current economic situation, while the economy is shut down, unemployment is rising sharply and the government is providing relief for workers and businesses, picking a bottom will again be extremely difficult, Braakman says.
“Anyone who can tell with certainty how this all reconciles is a charlatan,” Braakman says. “With high volatility, mistakes can be amplified. You should stay disciplined with your long-term asset allocation.
Don’t sell stocks and run to cash
Sure, cash is safe, and stocks are risky in a bear market. But that doesn’t mean cash is the answer to all your financial problems – especially if you’re saving for retirement that’s decades away.
“Another big mistake that investors make in a bear market is moving to cash,” Braakman says.
No doubt, cash minimizes paper losses when stocks are in free fall. But stocks don’t stay down forever. Like New York’s lotto slogan says, “You’ve gotta be in it to win it.” (We’re not equating investing with gambling, but it’s true that you can’t participate in a market rebound if your money isn’t invested.)
“You never know,” Braakman warns, ”the recovery could potentially be quick.”
The problem is most people who get out of the market won’t get back in at the right time, Braakman says.
“In earlier bear markets, it took years for investors who moved to cash to come back, so they missed much of the rebound after selling on the way down,” Braakman said. “The lesson is to stay disciplined in your long-term plan.
Don’t own all risky stuff
Reaching for the biggest gains and investing only in the riskiest stuff is a recipe for disaster.
You must “build some protection into your portfolio,” advises Kelly LaVigne, VP of consumer insights for Allianz Life. Too often, he says, when people are “chasing” returns they forget about the lessons they’ve learned about managing risk.
LaVigne says, “If bear markets teach us anything, it’s that a good retirement portfolio – particularly for those within 10 years of retirement – needs to have a balance of accumulation and protection, to help ensure all those funds you spent time building don’t disappear the next time a black swan event occurs.”
Don’t think your portfolio is conservative when it’s not
That can prove costly, says David Reyes, financial adviser at Reyes Financial Architecture.
“The average investor’s portfolio is way too aggressive for their needs and for their ability to psychologically take on the risks of bear markets,” Reyes says. People end up losing more money than they can afford to lose, even some with a balanced portfolio of 60% stocks and 40% bonds, he says.
Another mistake is not paring back risk as you age and near retirement, says Jeff Soltow, financial planner at Frontier Wealth Management.
“(Many) investors will end up taking too much risk later in life and will suffer losses they won’t recover from,” Soltow says. “This sometimes forces them to continue working or they end up falling short in savings.”
Don’t try to time the market
Getting out at “the” market top and getting back in at “the” market bottom is hard to do. No, it’s pretty much impossible to get the timing exactly right. Don’t even try, says Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance.
“The worst thing investors can do during a bear market is try to time the market,” Zaccarelli says. “It is much more difficult than they realize.”
If you’re truly a long-term investor, stay the course and reap the gains the stock market has historically delivered over time to patient investors, he says.
You’re better off “staying invested than by gambling that (you) will be able to outsmart all of the other investors in the world through (your) unique ability to time things well on both when to sell and when to buy back,” Zaccarelli says.
Nobody can predict when stocks will stop going down and start to climb again, he says. The rebound off the bear market low in 2009 is a good example, he says.
“If people … were honest with themselves, they would remember that 3/9/09 felt as terrible as 2/9/09, 1/9/09, 12/9/08, 11/9/08,” Zaccarelli says. “Little did they know that from the bottom in 2009 that by 3/31/09, the market would be up 18%; by 6/30/09, the market would be up 36%; and by 12/31/09, it would be up by 65%.”
One more thing: Do have patience, LaVigne says, and do prepare now for the next bear attack.
“Much of the financial planning advice you’ll see at the beginning of a bear market revolves around having patience,” LaVigne says. “And with good reason, because for those that suffered significant losses in their portfolio, time will be their greatest ally. Do everything you can to avoid letting the next one – and there will be a next one – decimate your savings. The best way to do that is to build some protection into your portfolio to help ensure that at a minimum, you have the assets necessary to cover fixed costs in retirement.”
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