The stock market has gone through some dramatic volatility in recent weeks, huge declines followed by market rebounds. Swings of 500 points have become an everyday occurrence. And even a drop of 1300 points in one day has not led to panic.
The panic will arrive in coming days when third quarter statements arrive from your brokerage accounts, IRAs, and 40l(k) plan. There the carnage will be revealed on the bottom line.
We are in a bear market. Pundits will debate whether this is the “best time to buy stocks in a generation” or whether the Fed’s actions will cause a huge recession, falling earnings, and much lower stock prices. Watching them on tv is like watching a tennis game from midcourt – with your head moving quickly from one direction to another.
So instead of being ruled by emotion, let’s just consider the odds of your next decision – buy or sell – being the correct one.
A Double Bet
It takes discipline to ride out a bear market. Every new market low reminds you that you “should have” sold earlier. If you don’t have discipline, you will sell at your moment of greatest panic. Typically, that happens very near the lows – when the vast majority of investors decide to throw in the towel. In fact, that’s what makes bear market bottoms!
Sellers tell themselves that it’s time to sell before they “lose everything.” In point of fact, no one who rode out a bear market has ever lost “everything”. Very few companies don’t survive. If you’re appropriately diversified in a mutual fund, you will never lose “everything” – except your temper!
The second rationalization is that you will “sell now, and buy back at the bottom.” But they never ring a bell at the bottom. So you wait to see if this is “just a bounce” – and you miss the greatest returns of a bull market. The best gains in a bull market are made in the first few months of the rebound.
For example, after the dot-com bust, the S&P 500 bottomed at 777 on Oct. 9, 2002 – at the end of a 2.5-year bear market. After touching a bottom seen only in hindsight, the stock index then gained 15% over the following month and a total of 34% over the following year.
To make money selling into a bear market, you have to be right TWO times – when to sell, and even more tricky – when to buy, again. Can you do that?
Riding it Out
That brings us to the strategy of “riding it out.” It’s almost as tough as selling high and buying low. Bear markets seem to last forever. But in reality, according to the market historians at Investech.com, the 10 bear markets since 1956 averaged a 33.5% decline, and lasted an average of 14 months.
However, real life is never average. The bear market of 2007 saw a 57% drop in the S&P 500 index from top to ultimate bottom. As scary as that sounds, a significant number of major American companies are today already down that far from their all-time highs.
The original FANG stocks have been decimated. Meta (Facebook) is down nearly 60%. Amazon fell from over $177 to below $113. Netflix which traded over $700 earlier this year has been down to $163, before bouncing back to over $225. And Google (now Alphabet) has fallen from over $150 to a low of $96.
The S&P 500 is down about 24% as of this writing, and the NASDAQ is down more than 33%. But many of the big names have fallen more than 70%. That’s what a bear market feels like – pain in the portfolio.
When Will It End?
Market historian, Jim Stack of Investech.com, who had his subscribers well-prepared for this event with only 40% invested in equities, told me that we could currently be only one-third of the way into the bear market, and that the decline could still have a way to go. He’s concerned about the impact on the housing market as mortgage rates continue to rise.
This bear market shouldn’t trouble younger investors, who regularly contribute to their 40l(k) plans, buying at bargain prices. But those closer to retirement may still need to sell SOME of their holdings on any bounce. Hold the rest. And don’t look back! You’ll never be 100% right.
But you will be able to sleep at night with some “chicken money” in high in money market accounts, T-bills, or in the bank. And that’s The Savage Truth.