Investor Psychology

My First Bear Market, By the Book

I'm boosting my 401(k) contributions now that my gym membership and student loan payments are on hold.

Practically as soon as I could count to 21, my father taught me to play blackjack. Dad insisted I play “by the book” (the one sold in casino gift shops), always making the move with the best odds to win the most money. Sometimes that means doubling your bet with a relatively weak hand, or asking for another card, even when it looks like you’ll win. Easy enough, when Pops is dealing at the kitchen counter. When it’s 3 a.m. in Atlantic City, and it’s real money on the line, things get trickier.

I started at Kiplinger’s Personal Finance in 2013, and I have researched plenty of investing advice since then, including strategies for bear markets. But like millions of young investors, until recently I had never experienced a bear face to face. It has been a scary encounter. Amid the global COVID-19 pandemic, it took Standard & Poor’s 500-stock index just 16 trading days to fall 20% (official bear territory) from its late-February peak. As of mid April, U.S. stocks are down 14.8%, and uncertainty remains as to when people’s lives, and the economy, will get back to normal.

That’s enough to make anyone sweat. But in investing, as in blackjack, you boost your odds of winning by sticking to your plan. That’s why, when faced with my first bear market, I initially did … nothing. For folks with a long-term investment strategy in place, that’s the right idea, says Mary Allmon, a certified financial planner and portfolio manager at Marietta Investment Partners in Milwaukee. “These are pretty extreme times for the market, but if your long-term goals haven’t changed, neither should your core strategy,” she says.

That doesn’t mean you can’t make adjustments. My portfolio, invested entirely in stocks, has taken a major hit. Because I won’t need the money for more than 30 years, I’m comfortable waiting for stocks to bounce back and can tolerate a good deal of volatility in the meantime. But if your losses keep you up at night, you may not be invested in line with your risk tolerance, says Allmon. In that case, consider paring your allocation to riskier assets, such as stocks, in favor of more-staid fare, such as bonds.

Grab your bucket. “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold,” Warren Buffett wrote in his 2017 letter to shareholders. When that happens, he says, reach for a bucket, not a thimble. For investors my age, things have never been cloudier. But since World War II, the market has withstood 12 bear attacks before this one. Each time, stocks recovered, then hit new highs.

“If shoes or jeans went on sale, you’d go shopping. Stocks are on sale. People tend to get nervous when that happens, but it should be the opposite,” says LPL investment strategist Ryan Detrick. Investors who can afford it (and I’m thankful to count myself among those who still have an income during these trying times) should take advantage of depressed stock prices over the short term by boosting contributions to accounts slated for long-term goals, says Detrick.

I’ll use a chunk of my stimulus check to bolster my emergency fund—everyone should have enough to cover three to six months of expenses stashed in short-term reserves. I’ll plunk the rest into my Roth IRA’s mix of diversified, low-cost mutual funds. I’m boosting my regular 401(k) contributions as well, now that my monthly gym membership and student loan payments are temporarily off the books.

I know that things could get even scarier. We don’t know when or at what level the market will bottom out. But when your heart is pounding, keep calm and play the percentages the way my father taught me to play blackjack: by the book. In blackjack, of course, you’ll eventually lose. The good news is that over long periods, investors in the broad U.S. stock market never have.

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