The stock market has gone through dramatic volatility in recent weeks, big drops followed by market rebounds. 500-point swings have become an everyday thing. And even a drop of 1,300 points in one day has not led to panic.
The panic will come in the next few days when the third quarter statements for your brokerage, IRA and 401(k) accounts arrive. There, the carnage will be revealed in the final result.
We are in a bear market. Pundits will debate whether this is the “best time to buy stocks in a generation” or whether the Fed’s actions will spark a major recession, plummeting earnings and much lower stock prices. Watching them on television is like watching a tennis match from the middle of the court, with your head snapping from one direction to another.
So instead of being ruled by emotion, let’s consider the odds that your next decision (buy or sell) will be the right one.
It takes discipline to ride out a bear market. Each new market low reminds you that you “should have” sold sooner. If you don’t have discipline, you will sell at your moment of greatest panic. This usually happens very close to the lows, when the vast majority of investors decide to throw in the towel. In fact, that is what makes the bear market bottom out!
Sellers tell themselves it’s time to sell before they “lose it all.” In fact, no one who has come out of a bear market has lost “everything.” Very few companies do not survive. If you’re properly diversified in a mutual fund, you’ll never lose “everything” except your temper!
The second rationalization is that “you will sell now and buy back later”. But they never ring a bell at the bottom. So you wait to see if this is “just a bounce”, and you miss out on the biggest returns from a bull market. The best profits in a bull market are made in the first few months of the bounce.
For example, after the dot-com crash, the S&P 500 bottomed out at 777 on October 9, 2002, at the end of a two-and-a-half-year bear market. After hitting a bottom seen only in hindsight, the stock index gained 15% over the next month and a total of 34% over the following year.
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To make money selling in a bear market, you have to get it right twice: when to sell and, even more complicated, when to buy back. Can you do that?
That brings us to the “hold on” strategy. It is almost as difficult as selling high and buying low. Bear markets seem to last forever. But in reality, according to market historians in Investech.comthe 10 bear markets since 1956 averaged a 33.5% drop and lasted an average of 14 months.
However, real life is never average. The 2007 bear market saw a 57% drop in the S&P 500 index from top to bottom. As scary as it sounds, a significant number of major US companies are already so far below their all-time highs.
FAANG’s original shares have been decimated. Meta (Facebook) is down almost 60%. Amazon fell from more than $177 to less than $113. Netflix, which traded over $700 earlier this year, dipped as low as $163, before recovering to over $225. And Google (now Alphabet) has fallen from over $150 to a low of $96.
The S&P 500 is down 24% at the time of this writing, and the NASDAQ is down over 33%. But many of the big names are down more than 70%. This is what a bear market feels like: pain in the portfolio.
Market historian Jim Stack of Investech, who had his subscribers well prepared for this event with only 40% invested in stocks, told me that we may currently be only a third of the way into a bear market, and that the drop is still could have a way to go. He is concerned about the impact on the housing market as mortgage rates continue to rise.
This bear market should not worry younger investors, who regularly contribute to their 401(k) plans by buying at bargain prices. But those closer to retirement may still need to sell some of their holdings on any rebound. Hold the rest. You will never be 100% correct. But you will be able to sleep at night. And that is The Wild Truth.