Avoiding Investor Mistakes Made During Bear Markets-This time it’s NOT different

Financial Planner Westport, CT

Avoiding Investor Mistakes Made During Bear Markets-This time it’s NOT different

Key Takeaways

  • Bear markets are painful, but given enough time, they always have paved the way for a fresh new bull market.
  • Don’t make irrational decisions during unsettling times or it could take you years to recover.
  • Bear markets occur for a wide variety of reasons…reasons that rarely repeat themselves in consecutive down markets.

As discussed in my last post, investors make plenty of mistakes when they sense the markets are going south. During unsettling times, investors tend to make irrational decisions that can take years to recover from.

Now that we have tackled corrections, let’s talk about BEAR markets.

As renowned investor and philanthropist, John Templeton famously said, “The four most expensive words in the English language are: This time it’s different.’”

If you recall from my previous post, Bloomberg defines a correction simply as a certain asset class (i.e. stocks, bonds, commodities, real estate, etc.) has declined by at least 10 percent during a given time period. A bear market means that an asset class has declined by at least 20 percent during a given time period.

As I’ve seen time and time again, I believe a true bear market occurs when the majority of investors believe things are going to be really bad for a very long period of time. The tough thing about predicting or detecting bear markets is that they are rarely caused by the same factors in consecutive declining market environments.

Just look at the bear markets we have endured so far this century. We’ve seen everything from the tech-bubble bursting in 2000, to the terrorist attacks of 9/11, to, and of course, the financial crisis of 2008–2009 when many believed we were on the brink of a global economic collapse. Each of these bear markets was driven by a different set of factors and circumstances. That’s why it’s tempting for investors to say to themselves: “THIS TIME ITS DIFFERENT” as they panic and move to cash.

Again, while the facts that caused each bear market are different, the outcome has always been the same. Often, we emerge from the depths of panic and despair and when nobody is looking- a new bull market appears and the economy finds it footing. This reversal usually happens when the sentiment in the market is as cold as liquid nitrogen. What’s really cool, is that given enough time, this rebound has happened every single time after a downturn and this reversal often happens rather quickly. That’s right. Every single time there was a bear market, after enough time had passed, a new bull market emergedwith no exceptions!

The chart below shows how often bear markets have occurred in the post-war era; how long they have lasted; and how severe they were

* Yardeni Research Inc.

Clients and other investors ask me all the time what my crystal ball says. They always ask how I can predict when the next bear market will occur and how they can best navigate it. My answer is always the same: “First, I am not a fortune teller, so I don’t own a crystal ball. Second, in order to exploit a bear market successfully, you need to be able to do three things at just the right time:

  1. Know exactly when to get out.
  2. Know exactly when to buy back in.
  3. Repeat Step 1 and Step 2 perfectly every time.

You might agree with me that it is not possible to get out at the peak of the market and buy back into the market at the bottom consistently. But, you are probably telling yourself: “I’ll get out and wait for the market to settle and then get back in.” Or, perhaps you’re telling yourself: “Maybe, I’ll wait for GDP to rebound or consumer confidence to strengthen because, hey, if consumers don’t feel good they won’t spend and companies won’t turn a profit and GDP will continue to fall and the markets won’t recover.”

I believe that this kind of thinking is a mistake, because the market is NOT concerned about today. The market doesn’t care what current GDP is. The market couldn’t care less how the consumer feels today. The market only cares about one thing and one thing only- TOMORROW. A new bull market tends to emerge when consumer confidence is low; when the economy is weak and when investors are miserable.

I empathize with you. Bear markets are tough and if you are in your 50s and if history is any guide, and for now it’s the only guide we have, you will probably live through seven or eight more of them. If you are in your 30s or 40s, you will likely live through even more of them. Do you really believe you can successfully sell at the peak and buy back at the trough each time a bear market occurs? Do you really want to stress out each time you hear: “This time it is different”? No! You know better than that.

Again, each bear market is caused by a different set of facts, but they all have one thing in common: every bear market given enough time, has given way to a new bull market.

As many of you know, the current bull market is eight years old-the second longest in history. As Bloomberg View opined in February, regardless of what the President does or doesn’t do during his first term, there’s a high probability that investors will see a bear market during his term. Whether the Bloomberg View is right or wrong, the next time you are faced with a bear market and are nervous to open your statements, how you react is what may determine your future financial security.

Don’t panic or fall asleep at the wheel!


Regardless of whether we will enter a bear market now or at some point in the future, there are always opportunities for smart investors to prosper. If you find yourself experiencing the turbulence of a bear market, maintain a disciplined investment strategy that is globally diversified with investments spanning multiple asset classes. Take advantage of dynamic rebalancing and tax-loss harvesting opportunities and most importantly, never waiver in the face of whatever apocalypse de-jour the financial news, economists, or financial pundits tell you “this time it’s different”. If you do these things, it is likely that once the long cold winter night comes to an end and new rays of the warm sun begin to emerge that brighten the sky and melt the ice, you will be far ahead of the heard that still has their head stuck in the sand.

If you or a business owner you know is concerned that the markets and the economy are running out of steam, please don’t hesitate to contact me. I’d be happy to help.

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