I recall from over twenty years ago, while beginning a long hike on the Franconia Range in the White Mountains, my brother and I debating which of his four young children might first ask, “How much farther is it?”, and how soon they might ask it. Focusing on the suffering a mountain climb inflicts can steal the opportunities it also extends to profit from the experience, and the same can be said of an investor’s perspective in a bear market. The climber benefits most by appreciating the wonder of the forest, the danger above tree line, and the beauty of the summit vista, and it helps to remember that every step represents one no longer required to soak one’s feet in the numbing river below. What principles can turn the dreaded bear market into an equally rewarding experience for investors?
The simple decision to enjoy, and benefit from the climb sets the mountaineer to meticulous planning and committed training. The following issues can help any investor think very differently about bear markets, and profit immensely from the opportunities they present:
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The most productive investments are made when prices are low. It will not “feel” right to buy when there’s blood in the streets, so have distinct parameters to make yourself do so.
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Capitulating, or selling stocks near a market bottom to stop the pain, is a catastrophe. Build cash by reducing stock exposure when prices are high by use of sell-limit orders, and by appropriating new contributions to cash.
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Always have an exit plan (specific parameters to sell) on all non-forever holdings from the date of purchase, and follow it judiciously.
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Never part with a forever holding due to emotional pain, or for any reason other than a fundamental change in that holding.
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Never be afraid to buy a great business at a reasonable price, but don’t back up the truck until the market bottom is confirmed.
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Train yourself to get excited when prices are low, and concerned when prices are high. Profit on the fear and greed of others by agreeing with the market’s cyclicality and counter-intuitiveness.
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Profitability comes more reliably from income streams than from appreciation potential; focus on dividends.
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Build a “watch list” of great businesses, the price at which you must own them, and should they fall so far, buy them.
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Heed Warren Buffet’s counsel that investing is like baseball in that you are never forced to swing at a pitch. Never make a purchase due to “Fear of missing out” (FOMO). Be patient when buying. Hunt like an alligator.
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Strictly adhere to proper position sizing. Never allocate more than 5% of your investable assets to a single stock, especially speculative positions.
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Dollar cost average the whole market cycle, preferably from peak to peak. Athletes train in the valley, not on the mountain top. The summit is the reward, not the daily experience. Do the work good investing requires.
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If retired, account for income withdrawals. Never be forced to sell at an unfavorable time to fund withdrawals, especially in a bear market.
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Learn to gauge the sentiment of others. When conversations tend to include the stock market and investment success, make sure your ‘stops’ are in order; when tales of woe and loss abound, make sure your cash is liquid and your watch list current.
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Understand returns are mostly attributable to asset allocation, as opposed to security selection. Focus on favored, and avoid unfavored industries. Don’t allow yourself to think favorably or unfavorably about the market as a whole, but investigate deeper what is wise to own at any given time.
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Get the highest fixed rate you can on cash savings, especially at decade-high Treasury rates, but keep it liquid, for the bear market bottom may come sooner than you think.
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Keep investment expenses to a minimum. Realize every dollar of expense directly reduces returns, and worse, it compounds that reduction indefinitely!
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If you hire someone to manage your hard-earned savings and investments, make sure it’s a fiduciary who represents your interests alone.
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Enjoy the investment process and never stop learning. Share your profits with those in need, and your knowledge with those eager to learn.
Think about it, Shaun.
“What the wise man does in the beginning, the fool does in the end.” ~Author unknown
“Investors who buy in stage one of a bull market, when prices are low because of prevailing pessimism, have the potential to earn high returns with little risk; the two prerequisites being money to spend and the nerve to spend it.” ~Howard Marks
“Give a portion to seven, and even to eight, for you don’t know what disaster may happen on earth.” ~Ecclesiastes 11:2
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
All investing involves risk including the possible loss of principle. No strategy assures success or protects against loss. Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
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