Bear markets are a natural part of investing in equities around the world. Bear markets are… well, nobody likes them. They’re tough, but they have always been temporary, and there’s never been a permanent loss of capital during bear markets of globally diversified portfolios. The most important thing about bear markets is to remember they’re not predictable when they begin, and you can’t predict when they’ll end. To receive a higher rate of return on your capital without investing in cash, you must always be invested in markets, and bear markets can create stress, which could create potential poor financial decisions. It’s like this demon has shown up to unsettle your mind. They seem to be at inopportune times in your life, but the reality is that any time a bear market rolls in, it’s inopportune.
The good part about bear markets is that while you might feel anxiety, usually other people have similar feelings, so your social spending habits as well as those of your peers may change. In other words, you may not spend the same way during a bear market (vacations, cars, boats, etc…), because you want to preserve your capital. Your friends may feel the same way.
Another good part of bear markets is that if there were none, there would be no excess return for money invested in global equities versus cash. People want all the upside of the equity markets, and those markets are incredibly, incredibly powerful — one of the most powerful forces of humans, equivalent to wars, elections, you name it. But unfortunately, with the markets comes uncertainty. The benefit of the bear market is that it allows you to get excess returns. If bear markets didn’t exist, bull markets wouldn’t either — then our excess returns over cash wouldn’t exist.
The other benefit of bear markets is if you can stay with it, usually, after the bottom has come and gone, the return over the next five years is really powerful. So, yes, you might suffer for a year or a bit longer, but there’s no other way to get those great returns unless you want to start speculating. There’s a lot of evidence that shows that speculators have poor performance in the end, and their loss of capital is permanent, like the recent crypto or High End Xspot. But the nice thing about a bear market is if you can keep your mind looking out for three, five, six, or seven years, the bottom of a bear market is always the beginning of a new bull market.
This is not the last bear market that will roll in, there’ll be plenty more. If you can weather a bear market by having a proper allocation of cash, bonds, and stocks, then the bear market becomes more of an annoyance than something permanent. If you’re forced to sell stocks in a bear market, that wouldn’t be fun, but let’s just say you had a portfolio of 50% fixed income and 50% stocks. A bear market might be a friend because, during the rebalance period, you might buy more stocks.
Especially now, versus 10 years ago, when every journalist out there or content creator was trying to get clicks. There are a lot of headlines that are created to try and scare people. Those headlines invade us all day long, and with the bear market, the media spouts if it bleeds, it leads. That’s the challenging part. It’s like this tormentor — when a bear market shows up, every headline is going to be how miserable you should be, or if you had only invested the way this prognostic had told you, you would have avoided, etc. So, there’s a lot of noise coming at you trying to get you off your game and saying how you could have avoided it — the beginning of bear markets is unpredictable. But if you can stay with the belief system of financial science, bear markets, while not fun, are just part of investing.
Let me conclude by saying that bear markets are not fun. They’re miserable, emotionally, but bear markets are essential for the growth of capital. If you want to be richer, you have to embrace bear markets because it’s a fact, that without them, you won’t achieve your financial goals.
Jeff Holland | VIAIV