A younger friend asked for my thoughts after their financial advisor suggested they ditch stocks for bond funds due to an anticipated bear market.
Without mincing words, I told them, “That’s ridiculous. You should consider finding a new advisor.”
Surprised, my friend asked why I felt that way.
I replied, “How can they predict a bear market?”
I explained that even the smartest economists and traders can’t time the market perfectly. Yet, somehow, this advisor from Akron claims to know what’s coming?
I urged my friend to ponder an essential question every investor should consider.
“How would a bear market impact you?”
Historically, since 1900, the U.S. stock market has yielded an average of 9.7% annually, weathering market corrections, typical bear markets, and significant downturns like the Great Depression and the financial crisis.
Capturing such gains requires riding out market fluctuations.
However, if you need access to your money soon, that’s a different scenario.
I always advise that funds needed within three years shouldn’t be invested in stocks. Not out of fear of a bear market, but because of the unpredictable nature of markets. If you need that money soon, it shouldn’t be exposed to potential volatility.
My friend, in his 40s and likely two decades from retirement, could face a market crash and temporary downturn without it affecting his mortgage or daily meals.
While seeing your net worth shrink isn’t pleasant, and may lead to spending cuts, if it doesn’t compromise your lifestyle’s essentials, reacting to market dips can be a costly blunder.
You’ll never reenter the market at the perfect time – the psychological strain is greatest at the bottom. Don’t deceive yourself into thinking you’ll get back in when prices dip further. You likely won’t.
The key to buying close to the bottom is sticking to a disciplined system, such as regular investments regardless of market conditions.
If you sell out of fear, you’ll likely miss the next upward trend and be hesitant to reenter. It’s a common human inclination.
If a bear market wouldn’t shake your ability to maintain your desired lifestyle in the coming years, tune out the market noise and maintain your strategy. Perhaps even look to invest more.
Conversely, if a down market would disrupt your lifestyle, ensure that the money you rely on is in safer vehicles, like cash or individual bonds, which offer both income and security.
Asking yourself, “How would a bear market affect me?” and responding appropriately – even if that means doing nothing – can significantly reduce the anxiety tied to declining markets.
