It’s been several years since we’ve seen anything close to a bear market (as defined by a 20 percent or greater decline in equity prices). In fact, the unusually smooth ride over the past few years might have lulled you into forgetting what it feels like to encounter more typical levels of market volatility, like the kind we’ve been experiencing lately.
Before I offer my thoughts on that, I have a related story to share. It’s based on my 2017 encounter with a flesh-and-blood bear, when my two teenaged daughters and I went backpacking in Washington’s Enchanted Valley along the Olympic Peninsula.
As the date neared for our long-planned hike, I read all about what to expect – soaring mountains, bright meadows, sparkling glaciers, flora and fauna … and bears. The literature and rangers alike emphasized repeatedly, “They’re out there.”
On our third day, their warnings proved accurate. A very large, very black bear appeared on the trail about 75 yards ahead, casually lumbering our way. I’ve encountered bears before while hiking, and have learned they usually opt for flight rather than fight. With my girls huddling quietly by my side, I spoke to him as calmly as I could, hoping he just hadn’t seen us.
“Hello Mr. Bear,” I tried soothingly. “That’s close enough, if you don’t mind.”
No response; he kept approaching! Thankfully, a quick “warning-shot” with some bear-powered pepper spray did the trick. Seemingly familiar with the stuff, he scurried away into the brush.
Whew. Now, bear with me while I translate our hiking adventure into four financial lessons for scary markets, great and small.
1. Be Prepared
The Olympic National Park rangers were helpful, but adamant: Bears are part of the landscape. You may see them anywhere, anytime, so don’t be too surprised when you do. Same thing for bear markets as well, as frequent “up and down” market volatility along the way. On average, a bear market has come along once every several years. Some may skitter away quickly; others may stubbornly hold their ground. That’s the nature of investing, and it means you must …
2. Be Equipped
While bears and other risks are to be expected in the financial and forested wilderness, we can’t predict when or where they’ll turn up, so your best defense is to prepare for them well in advance. On our hike, we were strongly advised to carry strong bear spray (thank goodness!) and to bring bear-proof cans to store our food. For your financial journey, I suggest you structure your investment risk exposure and cash-flow plans based on the assumption that it’s not only possible but likely you’ll see a beast or two along the way. That way, when it happens, you shouldn’t have to panic or drastically shift course. Instead, you are better positioned to …
3. Remain Calm
Bear markets and market volatility can be unnerving, especially when the news outlets and prognosticating pundits start yelling that you’d better DO SOMETHING FAST. It may be tempting to react in a rushed panic, but you’ll usually be better off if you stay calm and rely on that thorough preparation I just mentioned. It also helps to understand the nature of our financial markets, which brings me to my last point …
4. Know the Terrain
Why not just run away when market volatility is on the rise? Just as you shouldn’t break into a panicked run if you encounter a real bear (their chase instinct might kick in), it’s also an ill-advised strategy for a long-term investor. First, by the time you react to scary news, the related pricing damage already has been done, so you’re far more likely to lock in an unnecessary loss than avoid a potential one. Plus, trying to dodge the market’s unavoidable risks shifts you away from your desired destination, while you rack up extra costs with every unplanned trade.
Instead, remember that the stock market is not a Vegas casino in which you have to “beat the house” to win. It’s actually a highly efficient mechanism that has endured for hundreds of years. It’s done so by harnessing the ideas and inventions of countless individuals around the globe, and spitting out positive expected returns in aggregate to those who patiently participate (invest) in the world’s creative, innovative, productive capital enterprises.
Thus, you don’t need to “out-run” market downturns; you simply need to create a plan that makes sense for your goals, invest in low-cost funds whose managers are similarly patient … and hold your ground when a bear lumbers by now and then.
Rob Pool is an independent (fee-only) registered investment adviser with Fort Vancouver Investment Management.
