How Investors Should React to Bear Markets

Bear market – sell-off or stock up?

We all know that the financial industry likes to throw big terms around (such as naming the market a bear or bull market). Yet, it’s vital in understanding what these terms mean.

When the market is falling and it seems that everyone is selling, it’s called a bear market. When the market is doing well, it’s called a bull market. It is for this reason that outside Wall Street, you will see a statue of a bull.

So, when the market is failing, should I sell or should I buy?

Understanding the landscape

Historically, we have seen people giving their advisors the finger and requesting them to sell their holdings due to fear of losing money. We’ve also seen the markets go down substantially and only return back to normal after 25 years (see my article on ETFs and diversified investments here for info on crashes).

It’s also understandable why people would climb out of certain stocks such as Steinhoff, Tongaat Hullett etc. on the news of corruption, illegal activities etc.

With this in mind, it would thus make sense to educate ourselves about the landscape and how people think about investing, the stock market and money.

The opinion landscape

Don’t just trust anyone with your money
Though only registered financial advisors have the right to give you advice about where your money should be invested, it’s noteworthy that they do get paid to invest your money. With so many opinions, it might be wise to do the research yourself, read blogs, seek professional help and read many articles from trustworthy sources.

I am of the opinion that we’ve never had a bigger financial industry in the world. We have CFA’s, CFP’s, financial advisors, bank employees giving you their opinions about which savings accounts will suit you best and also money coaches in personal finances that have opinions.

With the liberated information stream that we have on the internet to get market data, opinions and investment advice for free. to navigate around this, let’s talk about these opinions.

Most financial advisors would be blunt and say you should stay in the market – yet, they have a vested interest in you keeping your investments with them. Their salaries depend on it!

Some wealth specialists will encourage a long term strategy to get your money out of the existing bear market and into another country’s economy that is experiencing a bull market. An example is the notorious Brenthurst Wealth director Magnys Heystek. He advocates that you take all your money overseas to greener pastures.

On the other hand, we have money coaches and people in personal finance. Some of these people are highly skilled in personal finance and even investment management, yet it’s difficult to distinguish who is truly knowledgeable and credible. These individuals tend to say you should invest your money in a low-cost well-diversified ETF with international exposure.

In general, it’s frowned upon to sell in a bear market by most of the above people. It’s also the opinion of some that you should not expose yourself to high-risk investments in your later years, as this might cause you to run out of money too soon.

Please see the sources below for their full articles!

Correction vs crashes vs recessions

Let’s get into some terminology, as this might also help us to navigate this landscape.

A correction is when the market falls more than 10%. This normally happens about once a year. It tends to correct itself fairly quickly and thus is not seen as severe as a recession, crash or bear market.

A crash is normally when a market or sector drops more than just a few per cent. Examples of this were in 1929 when the stock market crashed more than 20 % in 2 days and in 1987 when the Dow Jones Industrial Average lost 22.6% in one day.

Bear markets are normally longer than either of the above. Being similar to a crash – yet longer-lasting – the market doesn’t recover as fast as a week or two and it has a signature market pessimism and negativity about it.

A recession is generally defined as two successive quarters of negative growth in an economy.

Strategies and plans

As mentioned above, it’s generally frowned upon to withdraw your money during a crash, recession or correction. Though I do not believe in the philosophy of “keep an asset indefinitely”, I do think it’s worth thinking about strategies and options during a recession.

As part of your financial plan, you need to have a ruleset on when you will sell. The following options are available to you:

Rebalance your portfolio so that the desired asset allocation is followed
Diversify your portfolio – this might be needed when new opportunities come that you would want to pursue. Don’t invest your life savings in the one thing though!
Move out of the country until the scandal is over

What if I buy? What if I sell? What if I hold?

No buying or selling comes without risk.

It’s worth remembering that when you sell in a bear market, it could affect you negatively:

You won’t get the buying price:
- There’s normally a spread between the buying and selling price of a paper asset on the stock market. You will get the lower selling price
- There might be broker commissions and fees involved in selling
You might be buying high and selling low – which is the ideal strategy for wasting money

It’s not all risk-free when buying in a bear market:

The stock or ETF might still go lower for a while. In 1929, the Dow Jones Industrial index took 25+ years before reaching the same level again.
You will never know when the market has hit the lowest point – it would thus not make sense to try and time the market.

When holding, you could be losing some of your capital and not get dividends. If you hold stocks, it might happen that they never recover – ever.

The lesson here is the following – time in the market seems to be more important than timing the market.