I hate to bring you back to a scary time, but seven years ago this week; U.S. stock markets plunged to their worst levels of the entire bear market 0f 2008-2009. Although the entire financial system almost went over the cliff in September and October of 2008, it wasn’t until March 9, 2009 that stocks hit rock bottom. On that day, the Dow closed at 6547; the S&P 500 fell to 676; and the NASDAQ was at 1268. Thankfully, markets have charged higher since those dark days, but with recent volatility and market corrections, now seems like a perfect time to review those painful bear market lessons.
1. If want to take the ride, you have to prepare for ups and downs. The first time I went on the Dragon Coaster at Rye Playland, I learned this lesson, but that ride lasted just about two minutes. Unfortunately, the investor roller coaster spans a lifetime. If you plan to own securities to fund future obligations, you must accept that bear markets are part of the process. The good news is that not all bear markets are as awful as the last one, which was the most severe since the 1930’s.
2. Bear Markets are GOOD for long-term investors. Plunging markets are tough on the nerves, but if you are still saving for retirement or college, take solace in the fact that you are buying shares, which will eventually be seen as being on sale. As Warren Buffett once said, “Prospective purchasers [of stocks] should much prefer sinking prices.”
3. Borrowing can be dangerous. Whether it’s a house or a dot-com stock, one lesson is just because some bank/investment company is willing to lend you a lot of money, does not mean that you should take it. Too much leverage can be a scary thing, both for individuals and for companies. That’s why some basic rules of thumb exist—to keep us out of trouble!
For example, putting down a 20 percent down payment for a house is prudent, because just in case the housing market collapses, you have more built-inequity. A corollary of the debt warning is to read the fine print on all documents. There were too many instances when borrowers really did not understand the terms of the loans that they were assuming. Although many regulations now require more transparency and disclosure, we must be vigilant in reviewing documents to protect ourselves.
4. Emotions are your enemy. There's no better event to learn the lesson of how investor fear can lead you astray than the recent bear market. From the beginning stages in 2008 through the bear market low and then for months – even years – later, many investors wanted to sell everything and hide under the bed. That was an understandable feeling-it really was scary!
The big problem with selling when conditions are grim is that very few investors have the wherewithal to get back into the fray. When they do, it is usually long after markets have clawed their way back up. Acting on fear often ends up prompting you to sell low, buy high and take unnecessary overall losses in your portfolio.
5. Cash is King. Those who entered the financial crisis and ensuing bear market with a safety net (6 to 12 months of expenses and up to two years for retirees) were aptly rewarded. The bear can come at any time and if you had ample emergency reserves, you were able to refrain from selling assets at the wrong time and/or from invading retirement accounts.