What is This Bear Market Going To Do?

Should you run? Play dead? Make yourself look big? Get out the pepper spray? These are the options you have to decide on when facing a bear quickly and wisely. If you rely on your lizard brain, you will probably turn and run. If you researched the subject before you ventured into bear country, you could plan the best move — play dead if it is a grizzly and fight back if it is a black bear — according to the National Park Service. In any event, you’d be better off if you did some research before you came in contact with the bear. But this blog is not about live bears. It is about coming in contact with a bear market and stock market corrections.

One rule applies to both kinds of bears: If you haven’t researched stock market trends, you will probably run when you should freeze.

The study of behavioral economics has a concept called loss aversion. Loss aversion is a major factor in determining behavior when we are investing and especially when we are taking losses in a bear market or market correction. Loss aversion simply means that the misery we get from losses is about twice as large as the happiness we get from gains. For example, when you find a $20 bill in the parking lot, you feel pretty good. When you lose a $20 bill in the parking lot, you feel really terrible.

You have to rely on your analytical skills — instead of your emotional skills — when making important financial decisions. Keeping a long-term view and understanding the history of stock market growth are factors that allow your investment portfolio to grow over time.

Here is one key thing to know: Economic cycles are a main driver of stock market trends. Researchers have looked at the duration of recoveries, where the economy regains the losses from a recession and the duration of expansions, where the economy continues its upward motion. Over the last 50 years, the months of expansion have been twice as long as the months of recoveries.

Knowing what the stock market has done in the past does not automatically predict what it will do in the future; however, long-term trends may be our best indicator.

Another part of the equation is to understand your risk profile. If you are not sure what yours is, take an online risk-tolerance questionnaire. There are many to choose from. Study the results and use that knowledge to determine your long-term investment strategy.

Let’s take a look at some hypothetical investors who invested only at market peaks. They invested $6,000 at the market top in 1972, just before stocks halved in 1973–74. They didn’t sell, and in October of 1987, they invested another $46,000 in savings. Within months, the stocks dropped 34%. Again, they didn’t sell. In late 1999, they invested another $68,000. Then the dot-com bubble burst. By late 2002, stocks had dropped 50%. Still, they held on and invested another $64,000 in October 2007, just before the biggest crash since the 1930s depression.

The investors here may have had the world’s worst market timing, but by 2015, their total investment of $184,000 was worth $1.1 million!

The lesson is that the long-term strategy of buy and hold has worked well for a long time.

As far as that hike into bear country, be prepared. Bring those running shoes and sleep-acting skills. And know which to use when the time is right.

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Written by Dave, an Accredited Financial Counselor® who has been helping families plan their finances for more than 30 years.