What to Do in a Bear Market
When Will the Stock Market Recover and what should you do now?
I have experienced PLENTY of ups and downs in the market and let me tell you the biggest mistake I have ever made--selling.
I do not understand why people get so upset every time the stock market falls. It's as if they do not understand that stock market declines are TEMPORARY but people act like they are losing money PERMANENTLY.
You can of course turn a TEMPORARY decline into a PERMANENT decline by selling when your stocks are down.
Look at this chart and then read below.
The average bear market (a bear market being a decline of 20% or more) lasts 11 months. Do you know what I did in the last bear market (at the beginning of the pandemic)? I invested all the cash I had into stocks. And 12 months later I had significant profits.
So if anything, the best thing about a bear market is that OTHER people are foolishly selling and that creates a HUGE opportunity for you to buy. But the average person follows the crowd and does what other people do. Given that most people are poor (50% of Americans do not earn enough to file a tax return), the one way to ensure being poor is to do what most other people do.
So the chart tells us that the average bear market last 11 months. That does not mean this one might last 20 months or 30 months or even 40 months. But to think that somehow this is a permanent decline from which we will never recover is insane. Why is it insane? Look at the last hundred years and what happened every time a market declined? If you had patience, the market went up again to a new high, higher than ever before.
In other words, history is screaming at you how to be rich. But what do you do"? You worry that you've just lost half of your money and you better sell the other half before you lose it.
The Problem is Not a Stock Market Decline
Some people have a problem with their investments that existed even when the market was doing well. However, a bear market will bring to light lousy investments. So if you invested in crypto or meme stocks or other junk, rather than investing in high-quality companies with persistent and consistent earnings, shame on you. A bear market simply uncovers the foolery of silly investments.
There is nothing you can do now about your bad investments. You may as well ride out the bear market and hopefully, recover some of the value of investments you should have never owned in the first place. But admit to yourself the bear market is not the problem – the problem is that you picked silly investments.
The only thing you need to be rich
This chart shows the probability of earning a profit based on how long you hold your stocks
for example, if you buy a basket of stocks representing the S&P 500, and hold those stocks for a year, your chance of making a profit is 75%. Your chance of losing money is 25%. Only a fool would invest their money in something that had a 25% chance of loss. Therefore, to expect that your stocks will earn a profit for you over a 12-month period is silly.
But if you find the vertical bar labeled "10 years," your chance of having a profit rises to 94%. The lesson is simple – the stock market rewards patience and longevity of holdings. So please, do not be looking at what the stock market is done since January 1 and be worrying or complaining or stressing. Because the stock market doesn't care about the last five months. The stock market rewards profit over years and has continuously acted as a tool that takes money from the impatient and rewards the patient.
So the only thing you need to be rich, assuming you have purchased good quality stocks or mutual funds, is patience.
Not even during the Great Depression did investors lose money over 20 years, even adjusting for inflation.
You're Retired and You Cannot Wait 20 years for your stocks to recover
As stated above, the average bear market last 11 months, not 20 years.
Now let's assume you've created the following problem for yourself: you have been taking money out of your stock portfolio every month for living expenses. Now that your stocks are down, you are worried about depleting your stock market nest egg. Yep, you've created a problem for yourself.
As the above charts indicate, the stock market is not reliable over the short term. You cannot use it to generate reliable income over the short term. So if it was your idea or your financial advisor's idea to take money from your stock portfolio on a regular basis to support your spending, it was a bad idea.
Retirees need to use the bucket strategy. We have a detailed article on that as well as an upcoming YouTube video (click here to subscribe so that you see the bucket strategy video when published). The bucket strategy is a way of dividing your money so that you never depend on your stock holding for short-term expenses. Rather, divide your finds so that your stocks can be left to grow, say over 10 years where you have a 94% probability of having a profit. You can use "excess profits" over those 10 years to find your expenses buckets but your stock bucket is never relied upon for short-term expense needs. Full bucket strategy article here.
How to Protect Your Portfolio in Retirement - the summary
So now you have a formula
- invest in high-quality stocks or funds. How quality stocks are those with proven records of earning money in up and down markets and recessions
- Do not invest in junk (crypto, or companies with no earnings)
- Never rely on your stocks for short-term expenses. Use the bucket strategy so that your stocks have plenty of time to recover from a bear market
- Know that the average bear market lasts 11 months and that the market rewards patience