April 25, 2020

How I learned to stop worrying and love the bear market

Spencer Jakab, writing for The Wall Street Journal (3/28-29/20) explains:

A surprising share of a new bull market’s returns pile up in its very early stages, when the average investor is at their most fearful 

https://www.pexels.com/photo/woman-carrying-bear-plush-toy-inside-store-1860160/"Investor psychology in a major bear market is a mirror image of what it was the past few years: The more false alarms there were on the way up, the likelier investors were to embrace risk, viewing dips as buying opportunities. On the way down, so-called suckers’ rallies... get our hopes up and then crush them."

"A surprising share of a new bull market’s returns pile up in its very early stages when people are most fearful. Take the one that ended last month. Putting $100,000 into an S&P 500 index fund on the day the bull began on March 9, 2009 and selling at last month’s peak would have seen that turn into $630,000 including dividends. Waiting just three months to make sure it wasn’t yet another head fake would have earned you only $450,000."

"If you wait for happy headlines or hopeful government statistics for a clue for when to pounce, you’ll be too late. Stocks typically rally before a recession is over." 

"Making lemonade out of the market’s lemons sounds tempting, but it isn’t easy. The old saw goes that the stock market is the only one where people run away when there’s a sale. Beforehand they crowd in when the wares are most expensive because they see everyone else getting rich. For example, in the 10 months leading up to the last market peak in October 2007, a net $84 billion flowed into equity mutual funds according to the Investment Company Institute. By contrast, a net $233 billion flowed out from June 2008 through March 2009, the heart of the bear market when stocks became screaming bargains."

"If the last month truly convinced you that you had too much money in stocks to sleep well at night then take your lumps and dial back your risk permanently. But if you’re merely waiting for a sign that it’s safe to buy again then just hold your nose, increase your allocation to equities, and learn to love bear markets."

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