Ignore That Bear Market Headline, Part 1

“Without a rock-solid belief in the fundamental principles that undergird an intelligently crafted portfolio, weak-kneed investors face the likelihood of a disastrous whipsaw.” – David Swensen

Yesterday’s Los Angeles Times online article “Another sucker’s rally? Stocks are back in bear territory” declared that a bear market has returned. This won’t be the last article you see of this kind. This is just a guess, but watch for headlines that scream, “The Bear (Market) is BACK! What should you do NOW?” These articles sell publications. So what does this “bear market” actually mean to you?

A bear market is a prolonged period in which investment prices fall, accompanied by widespread pessimism. It is typically defined as a decline in a stock index of approximately 20% or more from a previous high.

A stock market decline of that magnitude is certainly noticeable. But once it has already occurred, what should you do? Probably nothing, especially if you have a well-thought-out strategy and properly diversified portfolio based on your individual circumstances.

The Media

Newspapers, magazines, and TV programs make the declaration of a bear market sound significant. They can always find someone who will compare this decline to past ones and make predictions about just how bad things will be. But the media’s attention to a bear market may be a distraction, it may be misleading, and it could lead you to do something harmful to your economic health. It could convince you to sell.

Yes, the stock market has declined more than 20% from its high, but did you actually buy at the high? It would have been quite difficult to have such exquisitely bad timing! Were you 100% in stocks, as if you were channeling a river boat gambler? I sure hope that you weren’t borrowing money to buy stocks.

As for going forward, please realize that it is impossible to know whether the decline will continue or reverse. Magazine articles or TV commentators may talk knowingly about the causes of this bear market, and why it will continue, but my advice is to ignore them.

We’ve had them before

According to Nick Murray’s Simple Wealth, Inevitable Wealth, not counting the current decline, we have had 12 bear markets since World War II. So these declines are actually quite common. And they have all been temporary.

In the past, we’ve had steep stock market declines caused by wars, high inflation, OPEC embargoes, credit crises, over-speculation, corporate overreaching and fraud. We’ve had assassinations, an impeachment and a president resign. We have had hedge funds implode, and seemingly great institutions disappear. Each time, while living through the terrible stock market, it seemed like that was the first time that such a negative constellation of events had ever occurred. But that wasn’t so. Our economy survived and stock prices recovered, as investor confidence returned.

How long withh this bear market last? No one knows! No one. Talking about the “average” decline is not particularly useful. Some bear markets have been short, some very steep, some unnervingly long and relentless.

Seeing your wealth decrease day by day is no fun. But a bear market is something you have to accept in order to get the long term (higher) returns associated with stocks. At least that is the way it has been in the past.

Feel the Fear But Don’t Act on It

With prices declining, and everyone talking about it, fear takes over, quite naturally. The L.A. Times companion article Investors flee as fear factor swamps markets worldwide is all about fear. In a relatively short piece, I counted the word “fear” 8 times, not to mention “worried” “nervous” and “hammered.” And what a litany of terribles. We’re doomed, doomed!

The final quote, “You tell me — why would you want to buy something now?”

I don’t know, maybe because stocks are on sale with prices reduced?

If you act on the fear, and sell in panic, you have lost. You may think that you will buy back, when things look safer, but the odds of your actually doing so are very small.

Conclusion

It is not easy to have the courage to ignore the pessimism, but over the long term, returns from stocks have more than made up for the periodic (and temporary) bear markets. Will the future look like the past? My guess is Yes.

To be continued …