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Surviving Bear Markets

Future bear markets usually arrive every three to five years (four years on average), and they can demolish your capital. Avoiding these slumps is the key to protecting your hard-earned capital. Unfortunately, most investors have no clue as to the market’s future direction, how the stock market works, or how to minimize their losses. Therefore, it is not surprising that investors suffer the consequences when a bear market sneaks up and severely mauls them.

There will definitely be future bear markets. The key to investing is to preserve your capital at all costs. That means you should take prudent actions to avoid bear markets and not be invested in stocks when they occur. If you do not exit the market to protect your hard-earned money, then your profits (if there are any) and even your principal will quickly shrink. How much can you lose in the next bear market?

Bear Market Losses

The crash of 1929 wiped out 86% of the value of investors’ portfolios, and the investors required 25.2 years to break even (not counting dividend reinvestment). Since then, there have been 19 bear markets, with an average loss of 33%, which took an average of 3.5 years to regain those losses. Don’t forget that a 50% loss in a stock or mutual funds requires a 100% gain, just to break even. Not only are bear markets deadly financially, they can and do inflict significant emotional harm to taking a loss as well.

Most studies have shown that investors buy at market tops and sell at the bottom – just the opposite of what they should be doing. Since investing is ruled by emotions, this situation will always occur. Fear and greed are factors that are at play when humans are involved, and this fact will never change.

The question you need to ask yourself now is whether we have entered another secular bear market that could last 12 to 17 years. No one knows the answer. That is why it is important to have a viable investing strategy and approach. Buying and holding in a secular bear market is not a money-making approach. And inflation always eats away at whatever returns you are able to obtain. After inflation, the two previous secular bear markets had negative returns.

Investing in a Bear Market

Intelligent investors know that bear markets are inevitable, and therefore you should either step aside, into cash or, depending on your level of risk tolerance, you should short the market using mutual funds that are specialized for investing in bear markets or exchange-traded funds. Learning what the normal stock market cycles are will help you in determining the right attitude for investing.

The stock market is not a place for amateur investors who think that they can sit back and rake in the profits, year after year with little risk. Historically, secular bull markets are followed by secular bear markets. The stock market is a very risky place, where investors need to be on their toes, or their feet will get burned.

Long-term financial success in the stock market is difficult to attain, if not impossible, unless investors use a solid investing plan, develop strict entry and exit strategies, and have the psychological makeup to make tough decisions when conditions look the bleakest. Bear markets occur often, take considerable time to come back to break even, and can result in significant financial loss and emotional distress. That is why investing in individual stocks or even stock mutual funds at the wrong time can be deadly to your wealth.


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