How I Learned to Stop Worrying and Love the Bear Market - The Wall Street Journal

Spencer Jakab

The Wall Street Journal

Biography
@spencerjakab
Spencer.Jakab@wsj.com

Updated March 27, 2020 7:18 am ET

Everyone thinks they’re a genius in a bull market, but it’s only when prices head south that some people really stand out from the crowd.

As odd as it sounds, the average investor is woefully below average. Compared to a robot who might invest through good and bad, ignoring newspaper headlines, a fallible human can end up with a lot less money on retirement day due to greed and fear. Knowing how to handle fearful times like these offer the best opportunity to avoid lagging behind the market.

Sure, some investors will claim they saw the coronavirus-induced bear market coming, just like there are people who say they sold ahead of the housing bubble or the dot-com crash. Maybe some of them are even telling the truth. But there were plenty of excuses to take profits over the past decade during what became the longest bull market in history—the trade war, the European debt crisis and ludicrous unicorn valuations, to name just a few. Up until a month ago, acting on them would have cost you.

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Trying to pick the bottom of a bear market is even more hazardous to your wealth. Being what seems like a long way from the top doesn’t mean you aren’t still just as far from the bottom: A market that has lost half of its value is one that lost a jarring 30% and then another 30% after that.

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—and the technical bull market we reached on Thursday may well have been one—get our hopes up and then crush them. By the time a really prolonged bear market is about to end, investors who haven’t sold in disgust probably have a lower percentage of their net worth in stocks than at the outset. That is one of the costliest mistakes investors make.

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. For example, imagine an investor who went back over the last eight recessions, all the way back to the Great Depression, and bought the S&P 500 or its predecessor index at the bottom of the accompanying bear market, only to sell as soon as the recession officially ended. This market-timing genius would have made an annualized return of over 64%. That compares to a long-run annualized return for U.S. stocks of about 9.6%.

You also can’t rely on unofficial information like whether your neighbors are still unemployed. Joblessness is headed much higher soon, which is poisonous for profits and consumer sentiment, but the situation will likely be bad and still getting worse when the market turns. Looking back at 14 spikes in unemployment going back to the 1930s, one could have bought stocks three months before the rate peaked and earned a respectable gain every single time.

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.