Bear Stock Market 2022

We officially hit Bear market territory in the stock market last week. A Bear market is defined as a drop in the stock market of 20% or more from the previous high.

This has been quite painful for investors (myself included), watching their investment balances drop more often than not so far this year. Based on the high inflation we are experiencing and higher interest rates on the horizon, it’s likely that the market will continue to have downward pressure going forward for at least a number of months.

How Long is this Going to Last?

No one knows. Run away fast from anyone that claims they know what is going to happen. There may be events that occur that cannot be predicted. Companies will react based on how things are going. Those reactions (such as layoffs) will have their own economic impacts.

What we can do is look at the past and generally discuss what is likely more often than not. You can then use that information to make informed decisions, noting that investment risk will always be there.

Generally speaking, Bear markets have often lasted 1 -2 years. But who knows, it could end sooner…or years later. The more important point is that it WILL LIKELY END at some point.

If it’s going to end, do you want to be invested or not? You think you can guess the bottom, or top? Good luck. I’m not going to try to do that. In my opinion it’s a fools errand. When the market moves up, if often goes up fast. This is often much faster than you can react (remember March of 2020?) and buy again, which means you miss the rebound.

Maybe you should be Buying?

One of Warren Buffett’s famous quotes is “be greedy when others are fearful and fearful when others are greedy.” It’s a contrarian point of view that says to do the opposite of what the crowd is doing.

Right now it’s safe to say that there is a lot of fear out there. Many investors (as do many public companies) look out to the next month or calendar quarter, and not much further than that. This can easily be defined as “short term thinking” rather than “long term.”

Short term thinking will likely tell you to sell to avoid further losses that are likely to continue. Long term thinking, and Buffett’s famous quote, would tell you that the market will likely go up again at some point (history says it’s not a matter of if…but when) and that you should consider taking advantage of a depressed or weak market to buy stocks at lower prices.

This is the greedy when others are fearful point he is trying to make.

What is your time horizon?

You are invested for a reason. What is it? When do you need the money from your investment? If you need the money soon (in the next year or so) you are likely in a bad place due to the current market situation.

If you don’t need the money for 10 years or more, you are probably in a very good place! You should applaud a market downturn, which gives you an opportunity to take advantage by investing at low prices that will typically pay off handsomely decades down the road.

If you need the money in 3 – 7 years you are kind of in no man’s land. The market will likely recover in that time frame, but you never know.

What are my investment choices?

This is one of the best questions you can ask yourself, or your investment advisor. If you think about it, your money has to go somewhere. You are either going to invest it somewhere (stocks, bonds, real estate, alternative investments) or put it in a bank account or CD, or under your mattress. Regardless, you have to make a choice. Doing nothing is a choice too!

All choices have their pitfalls, so just pulling your money out of one investment means you have to decide where it’s going to go. Note that inflation will eat up your cash purchasing power over time, so if you are not eventually gaining ground in some kind of investment you are likely losing ground, which you may or may not notice until sometime down the road when you realize your true spending power has eroded.

Risk Parity Style Investing

I personally like the Risk Parity investment methodology, which uses a delicate balance of uncorrelated investments to minimize volatility and increase your Safe Withdrawal Rate. This methodology will often smooth the ride (lower peaks and valleys) which let’s you sleep easier at night which making progress toward your investment goals.

This methodology is often beneficial for those approaching or in retirement. For the very young investor, decades from retirement or financial independence, conventional wisdom would say to invest fully in equities for maximum returns over time. The ride will be a lot rougher (bigger peaks and valleys) but decades down the road the payoff will often be significant.