The article was originally written in January 2002 for RC Peck’s Fearless Wealth™ Newsletter.
As you probably know, a bear market is characterized by a downward trend in stocks and other markets because of widespread pessimism about the future of the economy.
In the last century a total of 50 years was spent in bear market condition. That’s half the century. An eighteen-year bull market in stocks ended in 1999, and a twenty-one-year bull market in bonds was just ending. After every bull market in the last 200 years there’s been an equally long bear market. But that’s just history, and doesn’t mean that future bear markets will be longer or shorter then 18 or 21 years.
I’ve noticed that bear markets are a lot like springtime when looked at from a meteorologist’s point of view. With all the technology available, a meteorologist enjoys a very high probability of being correct when predicting the weather. In fact, the probability of being right is somewhere above 90%. But here’s an interesting detail: the 90% holds up only if spring season is not included.
Spring tends to be so crazy and unpredictable that when the meteorologists include spring (just one quarter of the year), the overall successful forecast rate drops to 60%. That’s not very good, considering that a forecast of a 60% chance of rain doesn’t predict how severe the rain might be, only that it ‘might’ rain.
In fact, the San Francisco Bay Area not long ago experienced severe rainstorms, and none of the local meteorologists predicted just how bad the rains were going to be. They knew that thunderstorms were coming, but none of them estimated just how hard and fast the rain would fall. In that year, rainfall records were broken all over the Bay Area. And then, when the meteorologists saw another storm system coming they over-predicted what would happen. The second system was nothing compared to the first. Perhaps they felt they needed to balance out their previous prediction!
The unpredictability of spring is just like the unpredictability of a bear market. Some people, including brokers, advisors and independent investors, hadn’t experienced a bear market during longer bull market periods. If they had only been investing during a twenty year bull market run, they didn’t run into any bears, so they didn’t now what one looks like or how they act. To them, the default strategy of “buy and hold” (a strategy that is getting absolutely slammed these days) made perfect sense.
A bear market will drive even professionals (like the ones who still can’t beat an unmanaged stock fund in a bull market) to find religion or a new line of work. Springtime is difficult for meteorologists and bear markets are very difficult for everyone. There’s a saying that bear markets are when people learn how to invest.
Bear markets are not the time to ‘wait it out’. If you do, you’ll be looking at a very long time horizon for getting back to parity with your investments. You’ve worked very hard for the money you’ve invested; it’s worth the extra time to make sure that your money is being protected and growing appropriately.
One thing you can do in a bear market is pay off debt (unsecured debt, like credit cards, not secured debt). Just as bear markets are difficult times for people wanting to grow their money in stocks, it’s a great time for people to pay down debt, for one simple reason: the opportunity costs are low, even zero.
In the past, if you had extra funds you would think twice about paying down debt because you either wanted to invest in the market, like your neighbor, or you wanted to be like your neighbor and live beyond your means.
The days of stocks going up 100% a year are over for awhile. But the time to eliminate your 10%, 15%, and 20% credit debt interest payments is now.
Use this “springtime” or this bear market to save outside the stock market. When you look back after we have passed through this period of market correction you will be thankful that you saved more money in cash and not the stock market.
By the way, when it comes to managing money we can sometimes be our own worst enemy. To see how you might be undermining yourself, and to get some insights into your own thinking about money, click the link below and take a look at the free course “The Ten Most Dangerous Thoughts to Your Wealth.” You can find the sign up for this powerful eCourse on the right side of the page.