Tips for a Snarling Bear Market: Stay Calm, Let the Bear Back Down
A bear market can be incredibly stressful. Your net worth shrinks and future plans can feel incredibly imperiled. The fight or flight response can kick in, but the sanest approach is to remain calm. In fact, bear markets aren’t really so different from real life bear encounters.
Stay Calm: Allow the Bear to Back Down
A month ago I went solo backpacking on the Lost Coast, a 26 mile stretch in Northern California where the rocky shoreline meets the steep base of the King Mountain Range. The strip of rock and sand between the ocean and the mountains is very narrow and there are long sections of the trek that can only be traversed at low tide. You only have a few hours to get through these “no pass” zones.
On my second day out, I woke and broke camp at the break of dawn to get through one of these zones. About two and a half miles through a 5 mile stretch, I heard a rock slide on the steep cliff just ahead and above me. I looked up and saw a black bear attempting to zig zag down the slope.
Our eyes met. We both froze. And, I quickly weighed my options. I could 1) retreat and not be able to get through the no pass zone or 2) calmly proceed. I opted to keep calm and carry on and (to my great relief) the bear opted to scramble back into the forest.
Whether my decision was the right protocol for a wild bear encounter is questionable. However, it is absolutely the perfect metaphor for facing a bear market. Stick with your long term investment plan.
The bear market will eventually retreat and your losses will be recovered in due time.
If you sell, then you will experience actual losses. Stick to your long term plan, your money will almost certainly recover and gain value over the long haul.
Put simply, a bear market is when a stock index falls 20% or more from its peak.
As of this writing, the S&P 500 is about 25% below the peaks seen in early 2022 and the NASDAQ is down more than 30% from November of 2021.
As disconcerting as it might be, it is perfectly normal to experience a bear while backpacking. And, while market downturns are also troubling, they are also a completely ordinary part of the economic cycle.
In fact, since 1932, bear markets have happened approximately every 4 years.
And, they have always always recovered their losses and gained additional value.
Bear markets are triggered by changes to interest rates, inflation, general economic woes, and also geopolitical events. However, most downturns are complicated and often involve multiple factors.
The longest downturn (308 days) occurred after the attack on Pearl Harbor. But, the average time to recover is around 45 days.
It may come as no surprise that the worst bear market of all time occurred around Black Monday in 1929. Stocks did not regain their peaks until 1954, two decades later.
(The good news? We’ve learned a lot about monetary policy since then and we are better equipped to move through bear markets quickly.)
Stock market recoveries will happen before you realize. It is dangerous to try to time buying and selling stocks to time the market.
You might be surprised to learn that the stock market’s best trading days typically occur within two weeks of its worst days.
There are two types of bear markets: those that overlap with a recession and those that don’t.
According to Ben Carlson, director of institutional asset management at Ritholtz Wealth Management (hear him on the NewRetirement Podcast), since 1928, 14 bear markets happened during recessions and another 11 bear markets since 1928 had nothing to do with recessions.
Bear markets that occur outside of recessions tend to be shallower and shorter. Economists disagree about whether we are currently in a recession or not.
For the vast majority of investors, especially those who have a long term investment strategy, doing NOTHING when stock markets go down is the BEST policy.
The stock market goes up and down in the short term. Over the long haul, it has historically done nothing but go up. Even a worst case year- or two-year contraction of the economy will likely eventually rebound.
So, most of the time, it is important to remain calm, don’t let emotions or stress take over and just carry on. Ignore it.
It is normal to want to know the impact of the current bear market on your long term finances. The NewRetirement Planner can help.
To assess the current downturn’s impact on your future wealth, try the following in the Planner:
- Start by updating your account values. (This happens automatically if you have linked your accounts using Plaid.)
- Next, input a 0% return for a period of time (however long you think the bear market will last).
- Then, model a future change to your rate of return starting at a future date. You might want to input a relatively conservative long term average rate of return. Or, try more aggressive rates.
- Finally, use charts from the Insights library to evaluate your: chance of success, savings values over time, net worth at longevity and more.
This exercise should help reassure that your long term security is not lost. Here are more tips for what to do when the stock market goes down.
If you are considering any moves, you may want to consult with a CERTIFIED FINANCIAL PLANNER™.
You can collaborate with an advisor who has taken a fiduciary oath and specializes in retirement to:
- Evaluate your situation
- Help you upgrade your stock portfolio
- Develop an Investment Policy Statement, defining your investment goals and strategies for achieving those objectives
- Reassure you