Thursday, October 09, 2008

Bear Market Survival Skills

I have been an stock investor through four bear markets (1981, 1987, 1990, and 2000) prior to current one which started in 2007. Even though my portfolio have sustained significant losses, I have been much more level headed during this bear market than in previous ones. If I could go back in time, here's what I would tell my younger self.
  • Don't invest money that may be needed in the short term. To me, it is painful to sell stocks at a loss just to generate needed cash. I've learned to keep cash needs in money markets and short term CDs. While they don't appreciate as much, I know I can count on a specific amount being available.

    Money I include in this category are emergency funds, next year's college tuition, and three year's of expenses when retired.

  • Invest in quality. Quality stocks tend to recover from bear markets. Poor stocks tend to stay at lower prices for a long time or even become worthless. A corollary to this is: Don't speculate too much.

    My experience shows speculative stocks suffer the worst declines during bear markets. I've had several go to zero. However, most of the quality stocks I owned recovered and advanced further.

  • It's impossible to call the bottom in advance. I wish I could time the markets, but I can't. Neither can experts call the bottom or top consistently. I now choose to stay invested in quality stocks, which should recover when the market turns.

    In the nineties, I bought Best Buy at $20 and then watched it decline to $11. Frustrated, I sold at $11. The stock then advanced to $80 over the following year. Recently, I bet wrongly bet on capitulation happening last week.

  • Don't let fear drive actions. The market always looks bleakest just before bottom. This is also the time when fear of further losses cause some to sell their stock holdings.

    At the end of 2002, I sold all my stock holdings, except for my company stock in our retirement accounts. By being in mostly cash, I missed the 2003 stock market rebound.

  • This too will pass. In every bear market, there are experts claiming a crash or depression. In every case, they have been wrong. At this point, I still believe the U.S. economy is strong enough to recover, no matter how bad it currently appears.

    I would tell my younger self that I should expect to lose money during a bear market. However, surviving a bear market means that I will make money in the next bull market.
  • Knowing all this hasn't improved my returns during the current bear market. However, it has enabled me to stay invested this time, while waiting for the expected turnaround. Hopefully, past bear markets are a good predictor of the future performance of this one :-)

    For more on Crossing Generations, Thursday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC


    Anonymous said...

    Thanks for posting your insight...

    Since I have 20-30 years to recover I don't fear the short term and have even purchased some "Quality" stocks which have been beaten down.

    One very good point that you mention is having short term capital. I would like to purchase my first home in the next year or so. I have been very patiently waiting for the housing market to correct itself. My 20% down is in money markets and bank savings. I am now just waiting to find the right house at the right price.

    I really enjoy reading your blog. Please keep up the great work.

    FYI: I am the person who provided you the information about the digital TV converter rebate.

    Super Saver said...

    @ Anonymous,

    Thanks for you comment and kind words. Also, thanks for the info on the digital TV converter rebate. I used a coupon to purchase a converer box and will enjoy not having to buy a new TV.

    Good luck on finding a house. Glad you have your down payment is a non-volatile account. Hopefully, you'll be able to find a great deal.