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5 Bear Market Hacks that Got Me Through the Last Recession
Well folks, it's officially a Bear Market now . . .
Well folks, it is officially a Bear Market now with the broad market down over 20%. The global pandemic and geo political instability have wrecked havoc on supply chains and confidence. The Fed is doing what they can to stabilize, but it appears to be a bumpy landing.
I am not worried
In my humble opinion, bear markets are nothing to fear. In fact, some of the greatest opportunities I have had in investing have been when there was fear and assets were dropping in value. I will lay out my 5 step plan during a bear market below.
Bear markets happen, which means stocks are generally going down in value. These are the times that test investors resolve. Typically the best thing to do is nothing if you are properly allocated and have a long term investing horizon. Bear markets are the opposite of what is called a bull market, when stocks are going up in value. No one knows exactly what the stock market will do over the next few years, but bear markets will happen. No one knows for sure when, but a bear market has certain advantages for long term investors and especially younger investors in their 20’s, 30’s and 40’s.
First, a bear market is broadly defined as a market in which prices are declining or falling, which encourages selling. An index like the S&P 500 (comprised of 500 big US companies from different sectors) falls 20% or more over a period of at least 2 months. The average length of a bear market historically is about a year.
Everyone loves when the market is skyrocketing every month, as has been the case for the last 10 plus years. But, this constant rise makes it more and more expensive to buy shares of strong and profitable companies. Therefore, many people are left out. Here are a couple hacks to keep in mind when a bear market wakes up from hibernation:
1. Focus on shares of quality companies and stock index funds. As a bear market roars on, this can be a great time to load up on shares of quality companies at a discount. Take for example some of the high quality dividend aristocrats and kings that have paid consistent dividends throughout many bear markets. Value investors like Mr. Buffett typically see this as a buying opportunity.
2. Normal cycle. There is a normal business cycle that seems to go up and down. Things do not always go one way, the markets need to work out any inefficiencies by having corrections or downward cycles. This is to be expected and embraced as an opportunity. Governments, societies, companies are things made up of millions of people making decisions, and these decisions typically have consequences for markets for better or worse.
3. Asset Mix. If one has the right asset mix and exposure, then they are not that worried about the ups and downs of the market. For me personally I generally use Ray Dalio’s “All Weather” portfolio mix. This portfolio allows me to not care what the market is doing each week and month. We describe the all weather portfolio in our book review: Money, Master the Game.
4. Focus on dividends. If you have stocks that pay dividends, then it really does not matter what the per share price is. In fact, if you have your dividends reinvested, you may like the share price going down because you’re buying more shares at a discount! Most folks focus on Dividend Kings and Aristocrats as defensive plays. These companies have 25 to 50 consecutive years of dividend payments, which means they have weathered a few financial bear markets.
If you have a Dividend Reinvestment Plan or DRIP going, then a bear market is a great time to pick up more shares at a cheaper price. This ability to purchase additional shares will create more income in the future.
5. Buying opportunity. During a bear market you can load up on more shares of quality companies at a discount. Your dollar cost averaging goes further and pushes down your average per share cost. Bear markets are a perfect time to take advantage of dollar cost averaging or DCA. DCA is when you buy shares of an index fund or ETF over long periods of time, creating a lower average price paid for the stock. During down times you pick up more shares.
Dollar cost averaging is one of the awesome math concepts that can work in a long term investors favor. Dollar cost averaging combined with DRIP (Dividend Reinvestment Program) and sprinkled with some compounding can create a powerful wealth building effect over time. To do this, simply check your dividend bearing stocks or ETFs and make sure you enable the dividend reinvestment option, rather than taking the dividends as cash.
BONUS: Cut Costs
Over the last couple of years of “too the moon” rallies, we have forgotten the less sexy part of wealth building — cutting costs and living frugally. In my view, this is just as critical as investing wisely. For me, it is a time to find new ways to save money by cutting costs or upgrading to more efficient appliances.
The bottom line is the bear is to be embraced like a big fluffy teddy bear. It is normal, can be managed and may be the best opportunity of you investment life.
This is not investment advice for any one individual. Please see a financial professional for questions about your unique situation.
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