How to Survive A Bear Market – Bob McCormick’s Market Observations
Tips in Investment Management
Just in time for investors nervous about the markets, the hiking guide “The Thought Experiment – How Can I Survive a Bear Attack?” from the writers at Science Focus.
The article’s three simple directives are:
1. Don’t run. Bears can reach speeds of up to 40 mph. You cannot. Besides, running only works up a bear’s appetite.
Just like bears, markets will move faster and change directions more rapidly than you are able to. In an attempt to time the market, there is an excellent chance you will sell out and buy back in at the wrong times, eliminating any benefits.
2. Don’t shoot. It can be really hard to hit a charging bear with a bullet, much less stop it. For most of us, trying to shoot a bear (while frantically running away) might be the last thing we ever attempt.
Risky moves in a bear market are also not smart for the average investor. Asset prices can go down further and faster than expected. For example, using debt to leverage your investments can inflict lasting damage. Over-leveraged homeowners found this out the hard way 10 years ago.
3. Don’t panic. Curl up, lie still, and protect your body. Be patient. The bear may hang around for awhile.
I am not suggesting the correct position in a bear market is fetal, but patience is crucial. And discipline. Your investment plan isn’t there just for stress-free markets.
The article’s title reveals the secret: a Thought Experiment. Before you start down the trail, think about what you could encounter. Be mentally prepared and practice how you will react if attacked.
Think through how you might respond to a 20% drop in stock prices (a common working definition of a bear market). There have been two corrections of about 10% each so far this year. How did those affect you?
Hopefully, none of us will ever come face-to-face with a bear in the wilderness. However, we will eventually face a bear in the markets. Historically, a bear market occurs about every three years on average. When the bear roars, the goal is to avoid permanent loss of capital. Don’t run. Don’t shoot. Don’t panic.
PS: Love bears more than bear markets? Check out this webcam from Brooks Falls, Alaska – a popular eating spot for the local bears.
World equity markets rallied strongly the last week of November, resulting in mostly positive returns for the month. Emerging markets were strong, partially rebounding from what has been a very difficult year. Fixed income markets also posted positive returns in November as intermediate- and long-term rates dropped slightly, pushing bond prices up. Click here to see the market returns.