As I write this, we are actually in the midst of a bull market. And it’s kind of funny because everyone’s been pretty quiet about it. I think after a long period of market concern, everyone is scared to jinx things. But I do have a warning, a bear market is coming.
And you need to be prepared. So this post is going to be full of some tips to help you when that moment strikes.
But, when is the bear market coming?
I have no idea.
Then how do I know it’s coming?
Because one always comes. The market is cyclical. And a bear market occurs on average every 3.5 years. Now remember, that’s an average. So it’s not like, on the dot, a bear market comes every three and a half years. But it’s a helpful number to remember.
And for completeness sake, the average bear market lasts about 10 months.
So, while it is possible that there could never be a bear market again, it’s not likely. I think most people will agree with this logic. However, it’s always funny that, during a bear market, we all seem to forget that bear markets exist. And we act like the market will always go up. That’s how crazes like the Dutch tulip craze and these more recent other flash in the pan investment crazes…
Instead, I think a much better plan is to recognize that one is coming and to prepare for it.
What can you do to prepare for the coming bear market?
It’s important to think about this.
Because just like out of control pessimism during a bear market can lead investors to really hurt themselves by selling stocks for a loss, over-optimism during a bull market can lead investors to invest recklessly.
The answer then becomes to find that middle ground. Which will inherently be different for everyone.
However there are some great strategies that we all can use to find out own middle ground, invest wisely, and not become over-optimistic during a bull market or fearful during the next bear market…whenever it comes.
Here are 3 evergreen, all-weather ways to invest – bear, bull, or bird (made-up) market…
1. Match your risk tolerance to your bond allocation
Investing can seem really complicated. But it’s not. And I hope that this blog helps to demystify things.
When you really break things down, your main investing strategy and risk tolerance comes down to a simple equation – what is your portfolio’s split between stocks and bonds. Yes, there are tons of different types of stocks and bonds that you can invest in – some better and some worse. But overall, I can tell you what your risk tolerance is by asking just one question – what percentage of binds do you invest in?
The reason is that bonds form the ballast of your investment boat
I’m not a big boat guy but I think this analogy works. Bonds are more conservative, less risky, but more stable investments compared to stocks. (And if you need a refresher on what exactly stocks and bonds are -because I needed one not that long ago- this post goes into detail.) The bond market also do not correlate directly with the stock market.
Thus, while bonds may not earn as much as stocks in a bull market, they really can help keep you afloat in a bear market. And if by keeping you afloat in a bear market, they help keep you from selling stocks at a loss or losing sleep, they are well, well worth it. (Bonds also play a more important role as you get closer to retirement when your investing goal is to maintain, not necessarily grow, your nest egg).
Your goal is to thread the needle in finding just the right amount of bonds to match your investing risk tolerance
And the best time to figure out your risk tolerance is not during a bear market after you decided to invest in 100% stocks during the preceding bull market. And now you are freaking out, can’t sleep, and are considering selling stocks to catch a falling knife (but really all you’ll do is sell at a loss and miss any subsequent upswing in the market…)
So, during the good times, think about how you would feel and what you would want during the bad times. Because they will come.
And I don’t say that to be a Debbie Downer. It’s just reality. And in fact, a bear market – when stocks are cheap – is actually the best time to buy stocks. So I want you to be in a good position to do that and take advantage. I don’t want you to be worried and scared and miss an opportunity.
So, to figure out or confirm your risk tolerance and what your bond allocation should be, use this simple guide!
2. Keep things simple
This is a theme throughout my blog. But simple is best.
I always use this analogy so I’ll use it again here. It’s like medicine. We all know medical mentors who kept things simple. They could break down complex topics, disease processes, or procedures in a way that you could understand. And then there are medical mentors who could take the same topic and make it seem so complicated that you began to question if you ever understood it in the first place.
I had both kinds of mentors. And the ones who I think actually understood things the best was always the simplifiers. And the same goes with investing!
It’s always funny to me. Because during a bull market, all of these new, fancy, complicated investment strategies and paradigms will comes out of the woodwork
Things like SPACs, for example.
And it becomes this thing where everyone gets FOMO and feels like they need to invest in them. Even though they don’t understand how they actually work. And honestly, often times people feel they need to invest in them because they don’t understand how they work. As if complexity means they must be good investments.
But then the inevitable market downturn and bull market come. And all of these fancy and complex investment fads fade away and disappear.
Because they were no good! For an investment to be worthwhile, it needs to hold water in both a bear and a bull market. Anything can look good in a bull market. Heck, even NFTs – which make no sense! – worked as a speculative investment for a bit. But that is not the test an investment must pass.
And do you know what holds true in all markets – a solid investing plan with low cost broadly diversified index funds of stocks and bonds. Maybe even real estate, though it’s not necessary.
3. Ignore the noise
This is so important and dovetails nicely on the point above.
The #1 reason that investors end up in a bad position in a bear market is because they were convinced by someone else. That someone else could be the news, a podcast, a financial advisor, a family member, or a friend.
Because when the market is good, the noise gets loud. Remember, everything (even NFTs for crying out loud!) can do well in a crazy up-market. So it can be hard to differentiate good from bad investments if you listen to the wrong noise.
And let’s be honest, it’s not sexy to talk about low cost index funds – now or during a bull market. But especially during a bull market. So that tends to get drowned out by people who are shouting louder, more seemingly exciting things. But remember, investing is not sexy. Or all that exciting on a short term scale. But speculating and gambling are very exiting on a short term scale. But don’t confuse them. You don’t want to gamble or speculate with your financial freedom.
And it all culminates by having a written financial plan
This is really what it is all about.
You want an investment strategy that matches your risk tolerance, that keeps it simple, and that ignores the noise. That makes sense in a bull market. And in a bear market. And everything in between.
So, you need to sit down, with alone or with your partner if you have one. And if you have partner, you need to include them – tips here for navigating those waters. And you want to formulate a written financial plan that you can refer back to when the noise gets loud. To remind yourself that all you need to do to reach financial freedom is to follow your plan. That gives you a peace of mind that is unmatched. Creating such a plan with my wife, Selenid, even went so far to improve my financial well-being that my burnout improved as a result.
While creating a written financial plan can seem daunting, the first post below will go through step-by-step in helping you create your own while the second includes our actual financial plan that you can use as a template in making you own!
And if you find yourself getting stuck in analysis paralysis about your plan, this post can help you break through!
What do you think? Is a bear market coming? When? Make a guess in the comments below and let’s see if we are right!