Lessons From Past Bear Markets With Mark Biller

Show Notes

Proverbs 21:5 teaches, “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.” And if there’s one place that calls for diligence and not making hasty decisions, it’s your investments. We’ll talk about that today win investment expert Mark Biller.

• Many Americans are nervous that the bears are about to be unleashed on Wall Street. But SMI just published an article that will help you prepare for whatever lies ahead. It’s titled, “Lessons From Past Bear Markets: Are you Prepared?”
• Mark Biller says investors really aren’t used to prolonged stock market downturns anymore.
• The 2018 and 2020 selloffs were as deep as what we’ve experienced this year, but they happened faster and ended much sooner. 2018 was three months long, while 2020 was really just one month from top to bottom, and both were followed by really rapid market rebounds. This year’s downturn is going on six months now and investors haven’t had to deal with many of these longer downturns in the past dozen years.
• A PERIOD OF ECONOMIC TRANSITION?
• Biller says we do seem to be at the end of a couple of longer-term cycles. One is the 30-year trend in globalization, which appears to be shifting away from greater global integration toward less globalization of the economy. That’s not all bad. There are some positives that are likely to come out of that eventually. But it’s definitely inflationary in the short-term, which makes it likely that inflation is probably going to be a lot stickier, or more persistent, than we’re used to after decades of falling inflation.
• The second big issue is that, because the Federal Reserve suddenly has to deal with inflation for the first time in a few decades, it means they can’t be single-mindedly focused on economic growth anymore. That growth focus has been great for investors, because every time the market has slipped in recent years, the Fed would come in and boost growth, which also boosted the financial markets. Now, the Fed is clearly saying that’s over - their focus is on getting inflation down and investors expecting the Fed to come to their rescue again could be in for an unpleasant surprise.
• WHAT CAN WE LEARN FROM PAST BEAR MARKETS?
• So what lessons can we learn from past bear markets, assuming we’re entering one now?
• Biller says the main point of the article is to reinforce the idea that investors need to be diversified and patient, and if they can do that, the long-term trajectory of the markets is higher.
• The article shows a 50-year “log chart” of the S&P 500 index, which simply means the chart shows the market’s past moves in percentage terms instead of price terms. That chart shows the last seven times prices have declined 20% or more, including this year’s selloff.
• The point of the chart is that when you zoom out over a longer period, you can barely even see this year’s downturn. You basically see this series of upward bouncing curves going higher over time.
• So the long-term prospects are still bright for the patient and diversified investor.
• PREPARING FOR A POTENTIAL LONGER BEAR MARKET
• If this is a new bear market and its length of decline matches the average of the prior six bear markets, we wouldn’t expect it to end until sometime in mid-2023.
• That seems like terrible news, right? But there is a silver lining. Because while we do think there are some things an investor can do to prepare for whatever downside may still be ahead of us, there are ways to take advantage of any further decline. You can do that in a couple of ways.
• The first is to be sure you’re prepared financially. If you haven’t been investing with borrowed money, you can survive any bear market. Just maintain your strategy and wait it out.
• A BEAR OPPORTUNITY
• For some investors though, bear markets are more of an opportunity than a threat. Lower stock prices are bad for people who have to sell, but they offer temporary bargains for people who have money to buy. Younger investors, in particular, can potentially benefit from a bear market by adding to their holdings. That may be by continuing to buy through their 401k plan at work.
• You also have to be prepared psychologically. Yes, we have problems in the short term, but the long-range outlook is positive.
• Years from now, stock prices will likely be far higher than they are now. Everyone loves the idea of buying low and selling high, but it’s crucial to realize that It’s through these bear market cycles that investors are given the opportunity to buy low.
• That doesn’t mean anyone hearing this should run out and buy all the stock they can right now. It’s simply to say that when properly prepared for, bear markets can be more of an advantage than a disadvantage for investors with a longer time horizon.
• FOR THOSE IN OR NEAR RETIREMENT
• Now, for someone in or near retirement, without a long time horizon to recover from big bear market losses, it’s a tougher situation. Hopefully, those that are close to retirement age are already well diversified and have less of their money allocated to stocks to begin with.
• One of the biggest problems after the big bear markets in 2000 and 2008 was people who sold when the markets were plunging to their lows, and then were too frightened to get back reinvested once those bear markets ended. Several years after the bear market ended, many people still had their assets in cash and missed the big market rebound. That’s what you DON'T want to do.
• Biller says is best advice to someone who feels they’re too exposed to stock market risk right now is that, if you feel like you need to lighten up, do it with a specific plan in mind. Make sure that plan covers not just raising some cash now, but exactly how you’re going to get that cash reinvested back into the market later. That might involve working with an advisor who can do that for you, or using a disciplined, mechanical process like what SMI provides.
• Don’t let fear govern your investing decisions. Have a plan and don’t panic sell as the market is falling.
• Remember that bad market periods are eventually followed by good market periods.
• After 13 years of rising prices, younger investors are finally getting a chance to buy at lower prices. So they should view that as an opportunity rather than a threat.
• BOTTOM LINE
• Investing success over the long-run comes from developing a practical, personalized strategy that focuses on owning quality investments. Then you must have the patience to stick with your plan and wait for the market to reward you over time.
• For more investment advice, visit SoundMindInvesting.org.

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