Can You Survive a Bear Market?

On March 9, 2015, the Wall Street Journal ran an article titled “How to Survive a Bear Market.”  The article highlighted the prediction, by experts, analysts, and amateurs alike, of a market downturn following the six-year bull market beginning March 2009.  But the markets proved resilient, and the ensuing 3 years produced a cumulative return of 31.09% for the S&P 500, or an annualized return of 7.34%.  Accurate long-term market predictions are a near impossibility, and something Wall Street has been trying to accomplish for decades without success.

We all know investing in the stock market produces a greater return over the long run than safer, less volatile investments, such as treasury bonds. So, logically, we all expect to see downturns and bear markets.  Dealing with these downturns and bear markets emotionally when we are in the throes of a market decline is another thing entirely. Once the markets begin to decline, we assume that the decline will continue into the foreseeable future, and we often feel the need to make changes to our portfolio or pull money from the market, “just until things calm down.” 

So what is the real answer? Can you survive a bear market? Most investors ask, “Where is the market headed?” The question they should be asking is, “When do I need the money?”  We know that bear markets occur on a regular, irregular basis.  See the chart below. Bear markets can be a reaction to true economic concerns, but can also be the result of a mini-panic. Recall the intra-year loss of over 19% in 2011 and declines of 12% in the Fall of 2015 over concerns about China’s slowing economic growth.

Surviving a bear market takes pre-planning.  Money needed within the next several years should be invested in safe/non-volatile assets to ensure the availability of the money when you need it.  Keeping your investments widely diversified will help you capture at least some upside in every asset class, as well as reduce volatility. Don’t take risks with fixed income. That portion of the portfolio is meant to act as a buffer, allowing you to take the equity risk needed to outpace inflation over the long term. High-risk bonds have a propensity to act like equities when the markets are volatile, just when you need the stability the most.

Finally, know that the skill of extrapolating bad experiences into the future is handy for human survival, but doesn’t apply to investing.  Learning to stay away from snakes once you’ve been bitten is smart.  Assuming the market will continue to decline because it’s already declined 20% is human nature, but not based in fact or on data. In a sense, successful investing goes against so much of what has kept us alive for thousands of years.