As I write these words at the market close on March 11, 2020 it seems a bear may be upon us. Those gnashing teeth, those grisly (bad pun) paws ripping that undefended flesh right down to the bone. Blood in the streets. Coronavirus in the wind. A worldwide pandemic (wow, that’s the first in my life).
Panic! Panic! Run for the hills.
I’m actually kind of smiling.
Am I Insane?
Sure, my portfolio’s gotten crushed since December 31st. Since I’m writing this post, I just HAD to look. Ugly. Ugly. As I’m writing this post, my Net Worth is down $213,700 for the year (thanks, Personal Capital, for making it too dang easy to check my net worth). Ouch. That’s some serious money.
And yet, I’m surprisingly relaxed. Almost feeling a bit giddy. Hard to explain, but I’m pleased to report I’m fairing quite well. In fact, I just bought some more stocks today. But…I’m getting ahead of myself. More on that in a moment….
I’m actually enjoying the ride. After all, I haven’t really LOST that money unless I sell. And I’m not selling. Quite the opposite. Relax, people. You’re not rookies. It’s time to act like the professional money managers you all are. After all, you’re in the small percentage of folks who read financial blogs, right? Take a step back, evaluate, learn, apply, and move on.
We don’t get to see the bear very often, and he’s a fascinating creature.
I love this stuff, actually. Bears live in these woods we all call home, and we should be fascinated by the rare close encounter we’re experiencing today. A real-life case study of what a bear market feels like, and we’re all living it together. Fun, right?
Come on, this isn’t your first time. You remember 2008, don’t you? Now THAT was a bear. Wow. And yet, we all survived. Thrived, even.
You knew this beast was coming out of the woods, didn’t you? I hope you were prepared. My 6 Steps To Avoid The Looming Bear Market may have been a bit premature, but the point was that we all knew this was coming, and we should have been taking steps to prepare during the rip-roaring markets we’ve enjoyed for the past decade. He’s been sleeping longer than usual this winter, and he was a bit late coming out of his hibernation.
But…he’s always been there.
Now, it appears he’s arrived. No surprise, really. This is why we’ve been preparing.
How Can I Be So Relaxed In the Midst of a Bear Mauling?
Maybe I’m really naive. Maybe I’m just eternally optimistic. Maybe I’m just an idiot.
Whatever it is, I’m relaxed. I’ve been preparing for this, and I’m not the least bit surprised that the bear’s gotten hungry during his long winter’s sleep. I’ve got three years of cash safely tucked away in my Bucket Strategy, and another 5 years of bonds and other stuff I could sell before I’d ever have to sell any stocks to feed my family. Some would argue that preserving 3 years of liquidity in cash carries a large opportunity cost given today’s low-interest rate environment. I say, let them eat cake. This is precisely why I have it, and I’m amazingly relaxed. A minor opportunity cost I’m more than happy to bear (another bad pun).
In reality, I’m a perpetual optimist, and I fully expect all of this will pass in time. That bear will go back to hide somewhere deep in the woods, and we’ll all return to our otherwise routine lives. Live it up, enjoy the experience.
This is fun, right?
I don’t think the bear’s teeth can kill me through the kevlar, though no one knows precisely what the future holds. That’s ok, it’s no excuse to panic. Stay calm and look for opportunities.
Warren Buffet’s a pretty smart guy, and I suspect he’s pretty calm right now, too. Buy when others are anxious, right? So, let’s look at some of the benefits we may be able to reap while Mr. Bear is storming through the forest.
Benefits of a Bear Market #1: Time to buy some stocks?
I’ve always believed in making small, incremental adjustments when the market makes big moves. I don’t do anything to rock my overall investment portfolio, but I keep a very close eye on asset allocation and follow a pre-determined course. We’re not entirely “timing” the market if we take the opportunity to buy small tranches on major down days, or sell small tranches on big up days. I was selling a bit at the end of last year since stocks had a huge run in 2019. I’ve got a pretty decent bucket of dry powder, and it’s a good time to put some of it to work. It’s not market timing if the moves are small, but rather an ongoing asset rebalancing approach. In reality, our asset allocation is moving, and small corrections along the way seem to be a reasonable approach.
I’ve been buying tranches of 1-2% of my portfolio on any market move exceeding 5%. For the first 5% down, I bought 1%. For the second 5% move down, I bought another 1%. Today, with the market down another 5% (making it an 18% correction YTD), I bought another 2%. I’ve sold some bonds to make the purchases and pulled a bit of excess cash into the market. I haven’t touched a single penny of my Bucket 1 cash, and I won’t. Gees, you don’t think I’m an idiot, do you?
The further it drops, the larger my % moves will likely be. I’ll never get above ~65% equity (I was at 46% stocks on Dec 31, as I shared in my Year-End financial update, so I’d been planning to bump up my equity a bit, anyway), but it seems a decent time to gradually buy into the dips.
Don’t time the market, but have a pre-determined plan for how you’ll handle market volatility. Build up some dry powder when the market is hot, and be patient. Keep within the pre-determined guardrails for your asset allocation. Then, stick with your plan. If your plan is a more simplified, “Don’t Sell”, then don’t sell. A sound strategy, and probably best for most people. But…what do I know? I’m just an idiot, right? 😉
Benefits of a Bear Market #2: Playing offense in an over-valued market
I’ve read many forecasts which call for a below-average return in the stock market over the next decade or so, and I tend to agree. The market valuations have been high, and things have a pattern of reverting to the mean. What does that look like, in practice?
Likely, it means a lot of volatility. Some big down moves, some big up moves, but a slower and more gradual overall move up than we’ve experienced in the past decade.
If that’s a likely market environment, what should we do? There’s certainly nothing wrong with choosing to “let it ride”, and just sit tight while the market gyrates. That’s a solid strategy, and probably best for most people (especially those of you who are still working, and dollar-cost averaging with each paycheck). Make sure you have your Bucket System in place to avoid selling in a downturn, and you’ll be fine over time.
For me, I like to take a bit more of an offensive approach. I won’t do anything stupid, and I don’t consider myself a market timer, but I’m willing to play around within a range of +/- 10% in my asset allocation to stocks. So, I ended the year at 46% stocks because I felt things were a bit over-heated. I may grow the allocation closer to 65% if this bear continues. A range of 46 – 65% stocks is a reasonable range for my risk tolerance, and I’m always keeping a strong defensive position of cash.
I like the way J. David Stein talks about that approach in Money For The Rest of Us, and encourage you to read the book if you’d like more insight into why this strategy is not considered market timing. I suspect the fact that I recently read that book has influenced my thinking on my current approach. What matters is that I’ve thought about it, and I’m sticking to a broader strategy instead of reacting in the moment.
Benefits of a Bear Market #3: If you’re still working, this is the best thing that could happen for you.
The last thing you want to do when you’re working is buy high, buy higher, buy higher, only to have the market collapse shortly after you’ve retired and aren’t buying anymore. Reversion to the mean, remember?
Back when I was working in 2008, I told everyone I worked with that “this is the best thing that could happen to us”. I increased my savings rate in the midst of the ’08-’09 bear market, the discounts were too good to pass up. If you’re dollar-cost averaging with every paycheck, count your blessings. You’re buying more shares every month, and everything will be fine with the long time horizon you’re facing.
Celebrate – this is the best news you’ve received this year! Really.
Benefits of a Bear Market #4: A Test of your Risk Tolerance
If you’re losing sleep due to that bear tearing at your door, you have too much of your allocation in stocks. Sure, you THOUGHT you liked taking risk when the market was heading up, but now you’re not so confident. Good for you, you’ve learned something about your risk tolerance. Hang in there, this thing will recover at some point.
The important thing is to remember how you’re feeling now, and make the appropriate adjustments after things rebound. If you were at 75% equity before this bear came out of the woods, plan on moving yourself to ~50 – 60% in time. I’m at 46%, and I’m not in the least bit worried. Your asset allocation must match your risk profile for you to have a truly great retirement, and now you know if you’ve been too aggressive. Thank the bear, he’s taught you something about yourself.
Benefits of a Bear Market #5: It’s time to do a Roth Conversion!
Credit for today’s post goes to John $, who sent me the following email earlier today:
Enjoy your blog. I just want to mention that since the markets are crashing, it is actually a good time to roll over a regular IRA to a Roth IRA. Since most of our holdings are beaten down you can roll them over at a lower tax cost now, and then when they recover (hopefully) in the Roth, you would have paid less tax to roll them.
Pass it along to the rest of the crew.
Of course John is correct, and his advice is sound. If you’re pursuing a Roth Conversion Strategy, it’s time to think seriously about executing your 2020 conversion. Here’s how to do it. I decided to go a step further with John’s thought and spent some time thinking of other benefits of a bear market. But…the seed was planted with that email. Thanks, John!
I wasn’t planning on writing this post today. For the past week, I’ve been working on a real doozy that I’m planning on posting next week. However, John’s email planted the seed, and this writer couldn’t let it stagnate in dry ground. I decided to add some water.
I read John’s email at 3:31 pm on Wednesday, 3/11, and by 5:05 pm this post was written. I think I’ll send it as a “surprise” second post on Thursday. Since you’re reading this, I guess I executed on that plan.
Somehow, it just seemed right to blast off a quick one on the topic of the bear market we’re all experiencing. I may not have thought it all the way through like I typically do with my posts, but it’s worth remembering that every crisis has both positives and negatives. It’s worth the risk of sending out a less “digested” post than normal, and I ask your forgiveness if I’ve missed the market. However, people seem to be a bit overly focused on the negatives, and I felt it was right to shoot out a quick one. At least you know what’s on my mind, within (literally) hours of me even having the thought.
It’s time to take a breath and look for something good in the world around us. Look hard enough, and you’ll find that even a bear market can bring benefits.
As long as he doesn’t devour you first. Pesky bears…
PS – Oh yeah, I also have a little “fun money” account where I do really idiotic trades. I’ve been selling some put options during the bear, too. Another of the benefits of a bear market? The volatility generates big option premiums! Yeah, I kinda like to play around with options, but only to the extent that I could lose it all and it wouldn’t impact my retirement. We’ve all go to have our hobbies, right? I’d suggest you don’t follow my example…
Your Turn: What other benefits of a bear market can you think of? Am I an idiot? How are you reacting to the market? Let’s chat…
Originally posted at https://www.theretirementmanifesto.com/the-benefits-of-a-bear-market/