Unvarnished Answers to 8 Questions About Investing in the Current Bear Market in Stocks

John Robinson |

By John H. Robinson, May 2022

As it says on the home page of the Financial Planning Hawaii and Fee-Only Planning Hawaii websites, “If you think financial planning is just about investing, think again.” Nonetheless, for as much as I incessantly extol the virtues of comprehensive planning, I have noticed that whenever things start to “get real” in the stock market (as they have been lately), investing becomes more of a front-burner issue. To be honest, I have not received too many concerned calls from clients yet, but I am sure that the fact that the U.S. stock market is down around 20% from its high a few months ago has not gone unnoticed.  The purpose of this article is to provide clear, unambiguous portfolio management guidance. Below are my responses to some of the questions that may be on consumers’ minds.

Is the stock market drop different this time?

No two bear markets are ever the same, but in this instance, history does seem to be rhyming. The current tilt strikes me as reminiscent of the 2000-2002 bear market.  The recent collapse of many formerly high-flying startup unicorns seems analogous to the collapse of the dotcom stocks and the recent fall from grace of app-driven brokerage firms and robo-advisors is analogous to the fall of the first generation of online brokerage/day-trading firms that flourished in the mid and late 1990s.  Further, the 2000-2002 downturn was exacerbated by 9/11 and the subsequent wars.  Today we have the war in Ukraine.  However, while the causes of bear markets are all at least a little bit different, the ending has always been the same -eventually the market recovers. Sometimes the downturn is short (as in 2020) and sometimes it takes a few years (as in 2000-2002 and 2007-2009). How long this one will last and how severe it will be are completely unknowable.


I’ve lost [Insert $ amount here] in my 401(k) plan this year.  What should I do?

First, don’t confuse volatility with permanent loss.  If the stock market eventually rebounds – which it has done 100% of the time in the past -  you will not have “lost” money. However, if you sell, it will indeed be a loss.  Second, if you are saving for retirement many years from now, you should view down markets as an opportunity.  Ideally, you want the markets to be depressed when you are investing and to be high when you are getting ready to spend in retirement.  The two biggest mistakes 401(k) plan participants consistently make during bear markets are (1) moving their savings out of stock funds and into bond funds and cash and (2) they stop contributing. 


Don’t you think the stock market is going to go lower?  Shouldn’t we just sell and get back in later when things are more settled?

In March 2020, I had a spirited conversation with a client who wished to liquidate his portfolio because he absolutely “knew” the market was going to go lower and was exasperated that I did not share his certainty. At that time the stock market was down more than 30% from the beginning of the year and then, like now, there was no clear end it sight. Against my advice, he sold his entire portfolio.  As it turned out, he sold one day before the market bottomed.  He never got back in because the stock market never gives a clear picture of its near-term direction.  Successful market timing means you have to pick the correct time to sell and the correct time to buy back right.  Very few investors get both decisions right.


How should I react with my investment strategy in response to the stock market decline?

If you are “reacting” to market declines, then something has gone very wrong in the planning process.  Reacting is essentially a market timing decision and there is a ton of published research documenting how disastrously bad consumers (and portfolio managers) are at making decisions about when to get into and out of the stock market.  Instead of reacting, we tell all clients to expect times like these and to prepare and plan for them in advance.  Money that may be needed for spending within five years, should not be in the stock market.  If you are approaching retirement you should have several years of planned expenses banked so that you do not have to sell stocks in a down market for income.   If you are saving for long-term investments, invest through the downturn.  If you do not have additional funds to add, then just ride it out.  It is a remarkably simple plan, and it is also remarkable how well it has worked through every bear market in the past.


Why should I believe the stock market will eventually rebound and go higher?

A part of the reason why many consumers get unsettled when the stock market declines is that they perceive it to be a mysterious, amorphous, ephemeral entity.   While it is impossible to predict how low the stock market may go or how long it will take to recover, the reason why the stock market always goes higher over time is that it is actually comprised of real companies that produce real goods and services and have real profits.   At the end of the day, the stock market is merely a mechanism for valuing these companies. To the extent that the companies you own earn more than they spend, over time they will be worth more.  This is the wheat. All the other ridiculous background noise you hear and read about market trends, timing, economic forecasts, etc. is the chaff.


What advice would you give to calm investors who may be freaking out now that the stock market is down 20% with no end in sight?

In my opinion and experience, there are two causes for investor irrational anxiety.  The first is a behavioral finance concept called loss aversion and the second is a lack of financial literacy. Loss aversion is the demonstrated truth that our brains are hardwired to avoid pain.  In the investment world, this means that investors fear loss more than they value gains.  I address this by helping people understand the difference between short-term price volatility and the risk of permanent loss. All investors need to understand from the outset that sometimes the stock market goes down.   Over my 30+ year career, I have seen the stock market fall 25% in one day (10/19/1987) and 35% in one month (Feb-Mar 2020). I have invested through two three-year periods in which the S&P 500 index declined more than 50% from its previous high (2000-2002 and 2007-2009). I have lost count of the number of times the stock market has fallen more than 10% from a previous high.  I find it helps investors to understand that betting against an eventual recovery in the stock market from all of these past bear markets has been a losing bet 100% of the time.

In terms of literacy, it helps to understand that successful investing in the stock market does not require reading tea leaves or divining trends from squiggly lines on a computer screen.  When one invests in the stock market the underlying investment is shares of real companies.  To the extent that these companies earn profits, the companies will eventually be worth more in the future than they are today. Making investing tangible makes it easy to ignore the distractions that cause consumers to make rash decisions that may harm their returns.


Some financial journalists recommended making allocations more conservative in response to changing risk tolerances and market conditions – you don’t do that?

To be blunt, I think that is terrible advice. It is true that consumers have a high tolerance for volatility when the stock market is rising and a low tolerance for risk when it is falling.    Shifting money out of stocks and into cash and/or bonds during a bear market is akin to advising a person who has a weight problem to eat comfort food to make them feel better. That advice is also a big part of the reason why most investors vastly underperform the overall stock market. Again, I believe a far better approach is to help people understand what they own and understand the reason why the stock market has recovered from 100% of all previous bear markets. Rather than give my clients comfort food, I much prefer to educate them about to how to alter their behavior in order to have a healthier, longer-lasting portfolio.


Don’t you get stressed out when the market is falling? Tell the truth, don’t you worry even a little bit?

I get asked this question frequently.  The answer is “YES”. I get stressed out every time the stock market declines sharply for more than a month or so… but not for the reasons you may be thinking.   The stress I feel is from worrying about the anxiety clients feel and how best to reach out to them to allay their fears. I worry about being clear, calm, and well-reasoned in my messaging to clients. 

However, I can honestly say I have absolutely zero worries about the stock market itself.  My own retirement portfolio is comprised almost entirely of rising dividend stocks and index funds (the same ones I recommend for clients).  I have been saving and investing for more than 30 years, so I have accumulated a pretty decent portfolio.  When the market swoons, my portfolio is no more immune than any other investor’s. The values on my monthly statements drop just like yours do.  When that happens (as it is now), I assure you I do not lose one second of sleep over it.  Regardless of the magnitude of the decline, I do not ever even flinch.   I am totally and completely immune to loss aversion.  The reason is that I understand exactly what I own and have no need to sell any of my stocks for income for a very long time.  To alleviate my stress, my plan is to impart the same calm confidence I feel about investing during bear markets to all of you!

John H. Robinson is the owner/founder of Financial Planning HawaiiFee-Only Planning Hawaii, and Paraplanning Hawaii.  He is also a co-founder of fintech software-maker Nest Egg Guru.




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