It is important to understand that bear markets are not uncommon. They occur every 5 years or so, and are defined as at least a 20% drop in the market values. The last bear market we had was after the tech bubble. It lasted 39 months, and dropped 49%. While not pleasant, bear markets are a fact of investing. There are some things you can do to survive a bear market.
1. Don’t over-extend yourself. It is not the time to make extra purchases that increase your debt load and put a strain on your cash flow. If the cash flow is healthy, despite the market conditions, it might not be a problem. But if you think that you may need to fall back on your investments for your financial liveliness, do not run up extra debt.
If you happen to be over-extended, and you are looking for a place to invest, it might not be a bad idea to focus on paying down debt. This is a sure fire way to save on interest you won’t be paying.
2. Stick to your financial plan. The reason we get emotional about our investments is because we focus too much on noise from media outlets and not enough on our original financial plan. Most comprehensive financial plans with backtesting over rolling periods of time have accounted for a bear market or two. It might be a good time to rebalance and revisit your plan, to make sure that you are still on target for your goals. But it isn’t the time to sell everything and go to cash.
3. Turn off the TV and Radio. While it is tempting to flip on the radio or TV to catch the latest forecast, it is important to realize that most of the time, they are not good indicators as to where the stock market is headed. It is when the market is at its worst and there is no end in site that it is the best time to hold your investments.
On October 10th, 2002, an article in the Money section of the USA Today read “Where’s the Bottom? No End in Sight.” October 9th was the bottom of that particular bear market in 2002 for the S&P 500. The bull that rode into Wall Street doubled stock prices over the next 5 years. More recently, on July 6th, 2008, an article in the Money section of USA Today read “Could cub grow into a grizzly bear market?” While this doesn’t mean we are experiencing a bottom, it might mean that the more doom and gloom we hear on the news, the closer to the bottom we are. The best way to handle noise is to tune it out.