Don't Chicken Out; Be A Bull During a Bear Market
If you're feeling lightheaded, uncomfortable, or sick to your stomach in the midst of this Bear-ish market, you're not alone. Millions of other investors are agonizing along with you, particularly the greenhorns among us. But, look on the bright side. What better time to evaluate - or reevaluate - your risk tolerance? Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Risky Business
By definition, investing is a risky endeavor and every investment plan worth its salt needs to include reflection on the degree of risk an individual is willing to take. And I’m supposing that your particular tolerance for risk, financial and otherwise, is simply “what it is”. And only you know for sure what it is.
We’re all different when it comes to risk. My willingness to take financial risk is probably very different from yours. And my willingness to take those other kinds of risk can be quite different than my willingness to take financial risks. For example, I’ll gamble on a business risk with its own unique challenges, but I avoid like crazy those risks associated with Vegas roulette wheels or Blackjack tables. Part of it is a lack of gambling skills, but I lack a plethora of business skills as well. I’m simply more tolerant of risks associated with business activities. In Vegas I see all of those tall buildings and…well…someone financed them - I just don't want it to be me.
Taking Stock
If this is your first Bear Market rodeo, perhaps you’re feeling completely stressed out. You may be having second thoughts about purchasing stocks. You may not yet fully appreciate stock market risk, and being new at the game, you may not yet know what your own risk tolerance is. My guess is, in today’s chaotic market, you’re now learning. So, what better time to evaluate your risk tolerance? I'll use myself - and my many encounters with past Bear markets - as an example.
Managing Risk
Even wily old investors like me who’ve lived through a few prior Bear markets can't help but get a little nervous when witnessing recent declines in the S&P 500, the NASDAQ, the Dow, etc. It still induces a lurking fear that this time it’s different. This time, we may not make it out of Bear territory.
Here's what we're dealing with:
Raging inflation
A tragic Eastern European war possibly triggering a potential European Union oil embargo
An American president of uncertain footing
Ever worsening political divisions across the country
China’s zero-Covid policies aggravating already existing supply-chain snags
A U.S. equities market that was too robust for too long
Migration issues
A Federal Reserve chairman facing challenging options…and so on.
For all of these reasons, this HAS TO BE a turning point – a brand new future without history as a guide. Or is it simply another unfortunate combination of negative financial and political circumstances revisited? That we might be entering a troubling new era might be true - we just don’t know. But it certainly prompts a nagging feeling.
Still, being an old codger and one with a…uh…decent memory, seismic change always makes me question my tolerance for risk. It induces a siege of uncertainties that I just might now have to deal with a new set of rules of engagement.
Past Experience
I’ve questioned my risk tolerance with past corrections of 15%, 20% , 30%, and even 35+%. I questioned not so much the prospective loss percentages, but rather my ability to do battle with the “what if” scenarios that might be changing the investment landscape forever. Is this the big one? The one that’s never happened before? Is this the one from which I won’t…none of us - will recover?
At times like this, it helps to review the 18-month Great Recession (Dec 2007-Jun 2009) and the early 1990s and early 2000s recessions (each lasting 8 months). On reflection, even the Great Recession doesn’t now seem so awful. But indeed it was. It hung around like a smelly old sock for a while…a recovery period that tested both my risk tolerance and my resolve. But the market did recover - as did I.
Bad Timing
As I’ve discussed at length in prior blogs regarding market timing, nobody, and I mean nobody, knows what's going to happen next. It matters little what the wisest of the Wazoos say about the future…about foreign wars…about all of the negatives mentioned above. Today, or tomorrow, the market might recover for perhaps irrational reasons…or take a weeks-long hiatus while leaving investor to agonize before it decides to dive again. Or not.
So, what’s my point in all this? The market is risky in good times and in bad. In those good times we worry less. When the bad times appear, we think more about risk. And what better time to evaluate risk tolerance then during the stressful times. Forget trying to predict what’s going to happen because you can’t, and if you overanalyze it, you’re liable to do something…well…stupid.
Don't Risk It
Remember, doing nothing during a Bear market is often a very wise decision. When the market corrects, it corrects. So, evaluate your tolerance for risk, face the uncertainty of the moment, knowing that you do not know what will happen next. What you should consider doing is simple enough. Maintain your faith in those past high quality, highly diversified investment decisions and exercise the patience necessary to stay the course (sounds like my old PDQ Principles of Investing).
If, while you are evaluating your own risk tolerance, you determine that your exposure to stocks is higher than your tolerance, what do you do? It’s often a bit late to reallocate. You can sell but will likely lock in real losses or take premature gains, creating a tax liability. And then you’re faced with having to time the market as to reentry (if you ever do), often resulting in opportunity costs due to late entry.
In Sum
Risk is part of the game in investing. So, fit your risk tolerance to that person you know so well. Don’t overstate it, but at the same time, know that it’s real. Once you come to grips with your real tolerance for risk, your life as an investor will be less stressful, and the probability of you addressing major shifts in the market – up and down – will likely be enhanced.
An everchanging stock market is one thing you can count on. And therein lies opportunity. If you plan to be a player, match the accompanying risk to your individual traits as an individual and enjoy the ride. And don’t let market risk steal your joy.