Bear market: Don't get spooked

Human beings tend to get emotional in a down market. But those that can endure the pain, will reap the benefits.


By The Mole, Money Magazine's undercover financial planner

NEW YORK (Money) -- Question: I'm seeing my account values take a daily dive and I've lost all of my gains from the past year, and then some. I'm hearing recession predictions and I'm wondering if I should cut my losses and get out of the market now. Do you think this is the beginning of a bear market?

The Mole's Answer: Don't panic! The bad news is I have absolutely no idea what the market will do in the short-term, nor does anyone else. The good news is that I'm 100 percent confident that:

  • The market is a great long-term investment.
  • The ups and downs of the market impact our financial futures a whole lot less than our reactions to it.

Unfortunately, we seem unalterably programmed to buy high and sell low. And even though history shows us time and again the error of this, we keep doing the same thing and expecting a different result.

The market is now down about 10 percent for the year and more than 15 percent from its high in October of last year. Sensationalistic headlines read something like "worst start ever for the stock market," and "as January goes, so goes the year." Such anxiety-inducing hype makes it virtually impossible for us to ignore the doom and gloom and just stay the course, but that's exactly what you should do.

Behaving badly

The current crisis du jour in the market, like almost all of them, has its roots in how we invest. It was incredibly easy three months ago to say that we have a high tolerance for risk. We had just seen our U.S. stock portfolio nearly double and our international stock portfolio nearly triple. With such a whopping gain, one would think we would surely be able to handle a small 15 percent pullback, right?

The truth is that most of us are fair weather investors. Our tendency to be risk tolerant in good times, and risk averse in bad times, causes us to feel a bit bullet-proof. The result is getting into stocks when the market is up, and doing the traditional "panic and sell" when it turns downward.

It may be hard for many of us to remember back to October of 2002 when stocks bottomed out, having fallen by nearly half since 2000. To jog your memory, go back to an article written by Jason Zweig, at the bottom of the bear market: Are you wired for wealth? Jason gave us a glimpse into our minds and explained why most of us were panicking and selling at the exact wrong time.

How to be an investor

It's easy to consider yourself an investor in good times, but it's the down markets that separate the real investors from the speculators. An investor understands that, after five straight up years in the market, a pullback is just part of the game. It's okay to feel the pain as long as you don't let it drive you to panic. As much as I hate to admit it, I look at my own portfolio daily for some reason I'll never be able to explain. I feel your pain, but I know my instinct to sell is dead wrong.

An investor needs to understand and have faith in the fact that capitalism works. Not to mention the fact that in the history of the U.S. stock market, it has only lost value a couple of times over a ten year period. Because rebalancing is a critical part of one's investing, now is the time to reallocate more toward equities, as long as one had a proper asset allocation strategy in the first place. After all, it's better to buy things on sale, isn't it?

My Advice: If you can't sleep at night wondering how much more stocks will fall, then the stock market was never right for you in the first place. Moving in and out of the market is likely to give you a low return.

On the other hand, if you can accept that bear markets are a necessary part of stock market investing, then look at this as a buying opportunity. If the market goes down further, it's an even better buying opportunity.

In the words of Warren Buffett, "Be fearful when others are greedy and greedy when others are fearful." That may be easier said than done, but it's good advice.

Comments

Post a Comment

Popular posts from this blog

US Quake Test Goes “Horribly Wrong”, Leaves 500,000 Dead In Haiti

By: Sorcha Faal, and as reported to her Western Subscribers A grim report prepared by the Russian Northern Fleet for Prime Minister Putin is stating today that the catastrophic earthquake that has devastated the Island of Haiti was the ‘clear result’ of a United States Navy test of one of its ‘earthquake weapons’ planned to be used by the Americans upon the Persian Nation of Iran but had gone ‘horribly wrong’. The Northern Fleet has been monitoring US Naval movements and activities in the Caribbean since 2008 when the Americans announced their intention to re-establish their Forth Fleet that had been disbanded in 1950, and which was responded to by the Motherland when later that year a Russian flotilla led by nuclear powered cruiser Peter the Great began their first exercises in this region since the ending of the Cold War. Though virtually unknown to the American people, the use, and perfection, of earthquake weapon technology has a decade’s long history that began with the former Sov
Read more

I'm an accountant, I hate my job, but seriously, I wouldn’t know what else to do

I was born to be a lot of things, but being an accountant isn't one of them. In my heart of hearts I have always known this, but for some stupid subconscious reason, I have always ignored it. Why? Well...um...err...I didn’t know what else to do. How many people faced with the same predicament of deciding on a profession upon graduating used “not really knowing what to do” as their guiding compass? Blink. Ten years have passed and you’re left wondering, how did I get here? In this cubicle? Doing something I cannot stand (and I’m not even honestly good at), with people I quite frankly don’t really care about? For me that was accounting, a profession that conjures numerous clichés, such as boring, bean counting, personality not needed, number crunching etc etc. These have now evolved and have been replaced by repetition, reconciliations, long hours, fudging figures, high turnover, Enron and even more reconciliations. R-E-S-P-E-C-T But please don’t get me wrong, I have the utmost respe
Read more

Have We Reached a Top?

By James Kostohryz It's never been my position that the flow of fundamental news would turn from positive to negative overnight and in a total fashion. The world simply doesn't work that way. When I terminated my core long position a couple of weeks ago for reasons explained in�Ten Reasons the Countertrend Rally May Be Over,�I outlined a series of factors I believe may manifest in the later half of 2009 and the first half of 2010. Indeed, most of these factors will be more back-end loaded, as negative factors tend to build on one another and gain momentum in time through the medium of psychology and social mood. It's my view that the flow of economically relevant events�-- and perceptions of these events --are in the early stages of a transition. In this case, a transition means the flow of relatively good news will tend to wane somewhat while there's an uptick in relatively bad news. This is what one would expect at a top. However, it's to be expected that during t
Read more