For a lot of us, this is the first proper* bear market we experience as investors. I’m here to try and walk you through it.
A bear market is defined as a drop of at least 20% from the all-time peak price.
From a quick Google search, I can see the S&P500 index (the one usually used to represent the US market, I will refer to it as “the market” later in this post) peaked at 4,818.62. A 20% drop from that price would be 3,854.90 (4,818.62 * 80%). That means that once the S&P500 index went below that number- we were officially in bear market territory. As I write these lines, the S&P500 index is at 3,661.56, welcome to bear market territory everyone, buckle up.
Does a bear market mean I should sell?
The real answer is “no one knows”. The market can keep going down or it can bounce back. If it is about to bounce back, selling would be a horrible idea. If it will keep going down, better to get out.
However, I am not selling and I’ll explain why.
Disclaimer: This is not (and shouldn’t be treated as) financial advice. Please consult a professional and/or do your own research.
1. Timing the market is almost impossible
The main reason I’m not selling is that timing the market is almost impossible. You also have to do it twice! To win here, you need to know exactly when to sell (at the peak) and when to buy again (at the bottom). Some professionals spend their whole professional life studying the market and they (with all their computing power) can’t time the market. I am humble enough to admit that if they struggle, my chances here are slim.
2. Bear markets are not a bug in the system, they’re a feature
Bear markets are not as rare as you’d expect, let’s look at some data I took from Yardeni.com. (The table below is from table 2 in the link, I only extracted the bear markets, highlighted in red in Yardeni’s table). I recommend clicking that link, there are some very interesting tables with interesting data. Anyway, back to bear markets.
There are a few conclusions we can take from the table above:
- Since 07/09/1929, we spent over 20% of the time in (or on the way to) a bear market. It’s actually a bit more because the current one isn’t included in the table yet, as it hasn’t ended.
- We had 21 bear markets in the past 93 years. That’s once every 4-5 years on average
- The average length of a bear market is 344 days, just under a year. The shortest one was in 2020, the COVID-19 bear market. As it was so short, it was more like a “trial run”.
- This is the most important one:
The S&P500 was at 31.92 on 07/09/1929. It is now at 3,661.56.
That’s an annual increase of 5.23%** (the calculation is: (3,661.56/31.92)^(1/93)-1, although it’s not exactly 93 years since). In addition, I’m only looking at price, which means I’m ignoring inflation and dividends. So we still get over 5% even with all these grim facts.
While you do get more than a 5% annual return, it is not a smooth ride. One year it can go up 15% and the next year it can go down 20% or more. This volatility is compensated by this 5%+ annual return. If you want stability, you should be looking at bank interests or bonds. I can save you the search, it’s a lot less than 5%. This brings me back to the point that these bear markets are not a bug in the system, they’re a feature.
3. Did you want to sell at the beginning of the year?
You have to remember that S&P500 is the 500 (roughly) largest traded companies traded in the US, and usually in the world. In addition, anytime you sell a share/stock, you’re saying that you believe it’s worth less than the current price.
The S&P500 is made of the same companies that were part of the S&P 500 at the beginning of the year. If you didn’t even think of selling back then and are thinking about it now, let me ask you a question:
You believed that S&P500 was worth around $4,800 a unit just 6-7 months ago, do you really believe that now the same companies are worth 20% less?
4. A loss is not realised until you sell
Remember that any drop in value is only a loss on paper. The loss becomes real only when you sell. Until then, it’s just background noise. If you are in it for the long run, short-term declines in the market shouldn’t bother you, I hope it doesn’t.
The number 1 rule of making money is “Buy low, sell high”. Selling after a crash is literally doing the opposite.
So what do I do in a bear market?
There is a famous piece of advice about what to do when being attacked by a grizzly bear- act dead. I think the same applies here. If you encounter a bear market, act dead. Let me explain what I mean.
As I mentioned above, trying to time or beat the market is almost impossible, the vast majority of active investors fail to beat the market. so my advice is… act dead.
Fidelity ran some research once and found that the accounts that had the best performance were dead people. The logic behind that is that when you try to sell and then buy again, and sell again, and buy again- you’re trying to time the market. Most people are very bad at this. Therefore, dead people got better performance! They didn’t trade, they just “held” their account and let it grow without disruptions. Let me be clear, we are talking about clients who invested in the exact same funds. By trying to time the market, on average, people got worse results.
I wish I could end this story here but unfortunately, the story above is not accurate (although this version is very widespread online). The truth isn’t too far though, the people with the highest return were inactive investors, people who forgot they had an account haha. The same logic and reasons apply though.
What stage are you in your investing life?
There are two stages in normal investing life:
- Accumulation stage- when you build your wealth and invest your money (by spending less than you earn)
- Decumulation- when you start to live off these investments and slowly sell them
If you are in the decumulation stage, a market crash or a bear market could mean bad news. However, we (the Lazy FI Family) are in the accumulation stage. A bear market is like a sale for us but instead of discounted shoes, we see a discount on our financial future.
It’s funny actually because I think stocks and shares are one of the only things that people buy less of as they become cheaper.
He showed that savers (people in the accumulation stage) actually benefit from an early bear market compared to a late one. I can explain why but his post is so good, I prefer you go read it (I know, very anti-lazy of me, sorry).
How to stay the course and not panic
I must be honest, Lazy FI Mum and I didn’t panic even for one second. We weren’t bothered when the market crashed two years ago and we are not bothered now. I think there are two main reasons for that.
The first one is that I brainwash myself. Yes, brainwash. I love personal finance so I listen to podcasts about it. I also read articles, blogs, books, and even academic research about it. The result is that I constantly remind myself that “time in the market is more important than timing the market”.
The second reason (which may have resulted from the first reason) is that we have a plan and we believe in it. The plan is simple: whenever our current account goes over a certain amount, we invest the surplus. We don’t care if the market is at an all-time high or if we are in a huge bear market, we keep following our plan.
If all this makes sense to you but you “just can’t help but panic” I have a treat for you:
If after everything is said and done, you realise that market drops prevent you from sleeping at night and that you’ll probably sell every time it crashes- I’m afraid the stock market isn’t for you. That’s fine, we need to acknowledge that. Maybe your path to FI involves real estate or some other path.
If you weren’t thinking of selling 6 months ago, no reason to do so now. As long as you are a long-term investor, pay no attention to what the market is doing and just keep following your plan.
* The COVID 19 bear market only lasted 33 days (see the attached table) so I don’t count it.
** Yes, the S&P500 grew more than 100 times in 93 years and it’s still “only” 5.23%, that’s the power of compounding for you.