What We Should Remember About Bear Markets: Part I

The following article is taken from ‘What We Should Remember About Bear Markets’ by Joe Wiggins.

Bear markets are an inescapable feature of equity investing. They are also the greatest challenge that investors will face. This is not because of the (hopefully temporary) losses that will be suffered, but the poor choices investors are liable to make during them. Bear markets change the decision-making dynamic entirely. In a bear market, smart long-term decisions often look foolish in the short-term; whereas in a bull market foolish long-term decisions often look smart in the short term.

If investors are to enjoy long-run investment success, they need to be able to navigate such exacting periods. There are certain features of bear markets that it pays to remember:

They are inevitable: Bear markets are an ingrained aspect of equity investing. Investors know that they will happen; they just cannot know when or why. Their occurrence should not be a surprise. The long-run return from owning equities would be significantly lower if it were not for bear markets.

It will feel predictable: As share prices fall, hindsight bias will go haywire. It will seem obvious that this environment was coming – the warning signs were everywhere. Investors will heedlessly ignore all the other periods where red flags were abundant and no such market decline occurred.

Nobody can call the bottom: Market timing is impossible, and this fact does not change during a bear market. The only difference is the attraction of attempting it when falling portfolio values can become overwhelming, and the damage it inflicts will likely be greater than usual.

Economic and market news will be conflated: The temptation to interlace economic developments with the prospects for stock market returns can become irresistible during a bear market. Weak economic news will make investors increasingly fearful about markets, despite this relationship being (at best) incredibly hazy.

Time horizons will contract: Bear markets induce panic, which shortens time horizons dramatically. Investors stop worrying about the value of their portfolio in thirty years and start thinking about the next thirty minutes. Being a long-term investor gets even more difficult during a bear market.

Investors don’t consider what a bear market really means: In the near-term, bear markets are about painful and worry-inducing portfolio losses, but what they really are is a repricing of the long-run cash flows generated by a business / the market. The core worth of those companies does not fluctuate nearly as much as short-term market pricing does.

Lower prices are good for long-term savers: For younger investors saving for the long-term, lower market prices are attractive and beneficial to long-run outcomes (it just won’t feel like it).

Source: ‘What We Should Remember About Bear Markets’ by Joe Wiggins published on behaviouralinvestment.com

Asset Multiplier Comments:

• Losing investment plans during bear markets is inevitable. Although difficult, long-term investors should sit through such exacting periods patiently and stick to their investment approaches.
• Investors can use bear markets to their advantage by accumulating quality stocks at cheaper valuations and profiting from long-term gains.
• Investors should avoid getting consumed by noise and immediacy and focus on building wealth over the long term.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”