As the investment world waits for the next bear market to begin, (and no one knows when that will happen), I want you to think about how you are going to react. How do you mentally process a bear market…as a victim or opportunist? Whatever you do, you can’t change a bear market, when it will begin, how long it lasts, or how long it will take to rebound. The only thing you can change is the way you experience the markets.
An old Zen parable speaks of two monks who were watching a flapping pennant. One monk said, “The pennant is moving, but the wind is not moving.” The other monk said, “It is the wind that is moving, the pennant is not moving.” A third monk happened along, overheard the conversation, & said, “The pennant is not moving, the wind is not moving, your minds are moving.
Nick Murray, author of Simple Wealth, Inevitable Wealth, says “I want you to take this as a parable that precisely describes bear markets.” What is happening in the market is infinitely less important than two things that affect how your mind is moving, while you are watching a bear market.
First, how surprised are you? What the market does to people is never as critical as whether or not, they are surprised by it. If a bear market has surprised you, you probably weren’t completely ready to deal with it. It’s best to have a psychological battle plan already in place for waiting out a bear market.
Second, what do you think is happening? It doesn’t matter how hard the wind is blowing or how hard the pennant is flapping. What do you think is going on? If you think this is the end of the world, you’re going to panic and get out. If you think that “this time is different” – the four most dangerous words in investing – you’re going to panic and get out.
Murray suggests we learn, objectively and intellectually, all about bear markets. Start with the bear markets that have occurred in this country since the end of World War II. Find out when they topped and bottomed out, the number of days in between each, and the percentage decline.
If you know the facts and know that bear markets are inevitable, you won’t get surprised, and that’s half the battle. The right mindset allows you to overcome all the media coverage portraying bear markets as the end of the world.
Can you get out at the top of the market and back in at the bottom? Not likely, and definitely not consistently. You don’t know when either the top or bottom is coming. That’s the problem with timing the market; you would need to be right twice and nobody can consistently do that.
Murray encourages us to hold in our minds the horror of those bear market events, as well as the glory of what happened to anyone who ignored them. He wants us to know four things:
- Bear markets are organic – they are part of the process. This time is not any different than other times. Markets tend to go up, but they also go down. It is the permanence of the advance and the temporariness of the decline that dictates the buy and hold procedure.
- Price and value are inversely related. The investor migrates toward things when price is falling because the risk is going down and the value is rising. The speculator does the opposite. He or she equates price with value and chases trends, thinking that as prices go up, so does value.
- Bear markets are absolutely necessary. The reason equities have returned much more than bonds have, during the last 80 years, is that equities have higher volatility. To wish that equity volatility would go away is to wish that returns would come down. You cannot have it both ways.
- Accumulators can make their money in bear markets. An accumulator creates the largest increases in his long-term rate of return by remaining a buyer all through bear markets.
If you don’t look at the wind or at the pennant, but focus instead on moving your mind, you can process bear markets not as disasters, but as big sales. It’s not the way of a victim, but the way of an opportunist.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results. Investing involves risks, including the loss of principal.
* Securities offered through LPL Financial, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. Old National Bank & Old National Investments are not registered broker/dealers and are not affiliated with LPL Financial. Old National Bank, Old National Investments, and LPL Financial are separate entities.
Sandy Derby, CFP®, ChFC LPL Financial Advisor, VP Southwest Michigan Region 5003 Century Ave Kalamazoo, MI 49006 269-459-0474 oldnational.investments TM