Don’t Run From the Bear

July 11, 2008

My friend, Allan Roth, wrote a great article about the bear market in the latest issue of Index Universe. I particularly like this quote from the article (emphasis mine):

At least I know that I don’t know what the market holds for us during the next six months. But, there are some things I know. First, I know that the market is a 17 percent better buy today than it was at its height during October 2007. A strong argument if ever I heard one that now is the time to start buying.

While this is a very logical argument, it falls on deaf ears when it comes to human behavior.

He then went on to illustrate his point with this interesting graphic showing equity mutual fund flows:

If there was ever proof that people do the opposite of what they should do, this is it. Instead of running from the bear [market], people should stare it down and call it’s bluff. Eventually things will turn around. Just rejoice at the marvelous big sale that’s going on right now in the market.

17 responses to Don’t Run From the Bear

  1. I work for a financial institution, and I have seen many accounts closing in the whole month (!) that I have been working here – and it is truly their loss!!

  2. Emotion runs the market, the ups and downs. I am pretty level headed when it comes to my investing but I will admit that it is really hard sometimes to watch a stock start falling. I can only imagine what it would be like if someone (an advisor) were picking my stocks for me.

    Robert K, the author of Rich Dad Poor dad mentions this in a few of his books. He mentions how people get into an investment at the top when they should be selling, and they get out at the bottom when they should be buying. I like purchasing stocks at a discount, but man do I wish I would have waited a few more months before investing more into starbucks…

  3. I know this is a down time and such a bargain, but having just started investing, my first purchase into 401k was in the beginning of April. I am still/already down 10% and that is with making bi-weekly contributions.

    I am still pumping away putting in every 2 weeks without much worry but I have never seen gains on my account.

    I guess it would have been worse if I had started last summer but that is harded to measure for me.

  4. The key here is human emotion. If we could invest and remove that aspect we would all be better off, but most of us do the opposite of what we should be doing.

  5. Having worked now for 16 years with a 401K to manage, and having gone through some ups and downs, I know that the best course of action is to just set a price point (either a dollar amount or a percentage, but make it consistent) and just keep at it, through good times and bad; dollar cost averaging at its most basic.

    Instead of dwelling on the price or on the total value, I look at the purchase periods and see the number of shares that I’ve purchased. While it’s not a total thrill (it’d be much more thrilling to see the total value of my portfolio rise regularly 🙂 ), it does bring a smile to my face to realize I’m buying more low (or lower) and I’m not buying so much when the prices are high.

    For brand new investors, I can imagine this doesn’t feel really good right now, but if you stick with it for the long haul, history has shown you are definitely likely to profit through these ups and downs, but be prepared to let time take its course (and make sure to reinvest dividends and distributions if you are not already doing so; that makes compound interest work even harder for you 🙂 ).

  6. I have always believed that humans logically know we should “buy low and sell high” but emotionally we are hard-wired to do the opposite. Unfortunately emotion wins 99% of the time.

    Jason Zweig has a fascinating article in the July/August issue of Journal of Indexes titled, “Your Money & Your Brain.” It should be required reading for every investor.

    http://www.indexuniverse.com/publications/journalofindexes.html

  7. Wow, it’s things like this that keep people poor. It’s the same BS baloney that was bandied about the last bear market. Investors just kept listening to bad advice like this and kept watching their money disappear. So tell now, how has the average Vanguard 500 investor done the past 10 years? Pitiful.

    Please don’t listen to these hacks that tell you to ride out bear markets. The problem of course is many are skilled enough to do anything different.

  8. Just remember that when the market turns, if you miss the ten best trading days of a new bull market you will forgo something like 90% of the total gain. If you are fully invested in the S&P 500 you do not own a diversified portfolio. Asset allocation is the key.

  9. All good advice but the problem is that each downturn looks like the sky is falling and this one may indeed be. We have a perfect storm: high energy, inflation, credit crunch, and now bank failures to the point that we are basically seeing a run on the banks. How much financial shock can the system absorb and can the government continue to print money forever? Sure we will survive, but nothing says that we are not into 5-10 years of painful recovery like seen in Japap, Argentina, and elsewhere.

  10. Missing the ten best days is yet another propaganda piece spewed by Wall Street.

    How about trying to miss the worst 10 days. Wall Street doesn’t publish those numbers cause it’s not in their best interest.

    Sheep.

  11. Oh and Asset Allocation no longer works but it will take 5 more years before you figure that out. The benefit has been tapped.

  12. So, “nowthatsdumb”, if riding out bear markets is the wrong thing to do, and asset allocations is the wrong thing to do, then what is the right thing to do?

  13. Sam,

    “nowthatsdumb” is just trying to be cute. He keeps all his money under his mattress but don’t worry, he’s paying himself interest.

  14. As of close today I am going back into the 2040 life cycle fund in my tsp. I have been waiting out the last few months in the LIncome. I dont like a wild ride, but I appreciate that at some point I have to go back in or end up with a much smaller pot. If I sit around waiting for the bottom I wont react quickly enough for the recovery.It’s probably going to go down some more before it’s all over with, but within the next 30 years I am confident I will come out ahead. If nowthatsdumb guy wants to share some of that skill to do something different with me I’m listening. Go to tsp.gov and hatch me a plan.
    PS what should I do with my gld and hcn in my roth? Baaaa

  15. In the words of Richard M. Salsman, “Anyone who bought stocks in mid-1929 and held on to them saw most of his adult life pass by before getting back to even.”
    nowthatsdumb is right. From 01/03/2000 to 06/30/2008, the price of S&P500 ETF SPY dropped 6.8%. Taking consideration of the approximately 2.2% pretax dividend and 10% federal dividend tax, the after tax return of SPY in the same period would be 11.3%, and annualized to be 1.27%. And that doesn’t include the devalutaion of the USD.
    Keeping cash in a CD account at an interest rate of 4.5% definitely beats the investment in S&P 500 for the same period.
    Given the prospect of Fannie & Freddie default. Keeping Cash under the mat seems a great deal. I’d just do it. Thanks a bunch JLP!

  16. The total return can fluctuate so wildly depending on the time-frame you’re actually looking at (both in the total time span and the starting point) so it’s hard to put stock into any numbers I read anywhere.

    My strategy: keep investing.

    My other strategy: build other income streams as well.

  17. I know I’m beating a dead horse here, but it helps to be diversified. Stocks, bonds, cash (in laddered CDs), real estate, they all belong in your asset allocation. Stuff goes up, stuff goes down; the trick is to try to have some stuff that is going up while other stuff goes down. Trying to time markets is pretty hard, just ask Bill Miller of Legg Mason this year. A well-diversified portfolio probably won’t be a “get rich quick” scheme, but it probably won’t be a “get poor quick” scheme either. If you’re working and can do so, just dollar-cost average into your balanced 401K, sock a bit away in safe laddered CDs for a rainy day, and keep a positive attitude.

    Just my $.02.

    Yours,

    Bozo