There is now a decent percentage of investors, particularly young physicians, who are experiencing their first bear market. There is really no better gauge for your risk tolerance than what you actually do during bear markets. If you are a new investor, I suggest you err on the conservative side when setting your asset allocation. Far better to be a little less aggressive (especially early on when savings rate matters so much more than investment return) and ramp it up later, than to be a little too aggressive and bailout in this CoronaBear or in any future bear market.
A financial catastrophe would be going to cash in the depths of a bear market, locking in returns, and missing out on the subsequent rebound. This is especially true late in your career or early in retirement. Doing this is far more common than many people realize. Nobody likes to talk about it, but the data doesn't lie.
This post is going to examine WHY people bailout, in hopes that once you understand the “why,” you will be able to avoid that terrible occurrence. After the six reasons, I will give some quick advice to someone who has found that they have exceeded their risk tolerance.
6 Reasons Why People Sell in a Bear Market
1. Scared By Short-Term Volatility
This is the number one reason people buy high and sell low, over and over and over again. They're afraid. They're afraid of losing money. And with good reason. They probably just lost a whole bunch of it. If you've got a million bucks in stocks, and the stock market drops 20% (the academic definition of a bear market), you've lost $200,000. That's real money. Even if your portfolio is buffered with bonds, you've probably still lost $100-150K. And yes, the money really is gone, no matter what anybody says about “You haven't lost money until you sell.”
If you made the mistake of investing money in long-term investments that you need in the short-term, you are probably really feeling the pressure. But even if you didn't, it hurts to realize that you could have gotten that kitchen upgrade, bought that new car, or even gone to Europe with the money you put in the 401(k) last year.
That $200,000 loss may represent 5 years (or more) worth of contributions to retirement accounts. It becomes very visceral. Psychology shows repeatedly that it hurts more to lose money than it feels good to make money.
Personally, I think folks scared by short term volatility are simply paying too much attention to something they shouldn't be paying attention to. If you are investing money you don't need for 20 or 30 years, why look at it every month, much less every day, especially when you know you are in a bear market? Every year or two ought to be plenty. But people are people, and when the Dow is in the non-financial news and your co-workers are talking about how their 401(k) became a 201(k), it can be hard to ignore.
2. Lack of Understanding of Market History
Many of the people who bail out of stocks simply don't understand market history. They assume this time it really is different. They believe the talking heads on TV saying the world is going to hell in a handbasket. Truman said, “The only thing new in the world is the history you don't know.”
The stock market may not always come back, but it always has so far. I certainly wouldn't bet against it by selling low. Wikipedia lists 49 different crashes, recessions, and bear markets. I suggest you learn about each one of them. It's not different this time. Remembering that will encourage you to not sell, rebalance, and perhaps even throw a little extra in during the depths of the next bear market.
3. Lack of Diversification
Market history teaches us that the overall market always comes back eventually (at least so far.) However, that is not even close to being true for individual companies or even countries (yes entire national stock markets have disappeared.) If you're invested in a handful of stocks and they're tanking for good reason, those people have a legitimate fear of losing their money. So they bailout. You can obviously avoid this by simply buying the market via low-cost index mutual funds instead of pretending you're Warren Buffett. Problem solved.
4. Fear of Real Market Risk
There are two types of market risk. We discussed the first, short-term volatility, under reason number one. That's the less significant of the two to overcome. If you simply don't invest money you need in the next 5-10 years into stocks, you can pretty much eliminate that concern.
However, the second type of market risk is very much real and is the type that “investing adults” worry about. That's the worry that the stock market won't come back….ever. The big risks here include hyperinflation (think Zimbabwe), deflation (think Japanese market in the 1990-2000s), confiscation (think about the Russian stock market just prior to the implementation of communism) and devastation (think German stock market at the end of WWII or a hypothetical handful of nuclear bombs going off in various US cities.)
Many wise investors, who know market history, who weathered the initial volatility scare, occasionally get worried that this time it really is different. Obviously, just telling people to suck it up, quit watching TV, and be patient isn't going to work here. What does work is implementing a plan, a priori, that should survive as many of these terrible scenarios as is reasonable. The interested reader is referred to Dr. Bernstein's excellent book Deep Risk.
5. Herd Mentality
Some people who sell out in bear markets are simply following the herd. Sounds stupid, I know, until you realize who the herd is. The herd is the guy you always talk investments with at the cocktail parties. The herd is your brother-in-law. The herd might even be your spouse.
What you must realize is that when you are deep in a bear market, many people will have already sold their stocks, and at a much higher price than stocks are currently at. A lucky few will somehow manage to get out early, but most have simply already bought high and sold low.
Humans are social creatures and there is an undeniable draw to do what others are doing. You must avoid that and invest with your brain instead of your emotions. However, don't deny the effect of the herd on you and those you love. I know several doctors who sold out at 2008 lows at the insistence of their spouse.
6. Sense of Missing Out
In a bear market, you will experience a sense of missing out. It will be vague and you won't quite be able to put your finger on it. But it is a sense that if you had been investing in a different way you would not have suffered these losses. That “way” may be trend-following, valuation-based market timing, stock picking or some other method. It can gnaw at you until you're no longer sleeping no matter how many TUMS you take. At that point, you'll be willing to lock in your losses just to get some sleep.
Perhaps the best antidote to bailing out in a bear market is to teach yourself that neither you nor anyone else, can accurately predict the future. If you haven't yet learned this, start now. Get a little 79 cent notebook from the grocery store. Write down what you think interest rates, the Fed, real estate, the stock market, the bond market, your favorite stocks, etc. are going to do in the next day, week, month, quarter, year, and 5 years. Every time you get a flash of insight, write it down. If you're like most (including me) it won't take you very long to convince yourself that your crystal ball shouldn't be trusted.
What To Do When You Can't Sleep
Now, as previously mentioned, is some advice for the person who is trying to weather a bear market, perhaps their first, and realized they can't do it. They're thinking about their investments every day, perhaps multiple times a day. They're waking up in the early morning hours worrying about the market. Here's what you should do.
1. Drag your feet
Don't do anything quickly. The median length of a bear market is 8 months (range 2-21). There is a very good chance by the time you get around to actually doing something, the bear market will be over and the next bull market will have begun. If you're already a few months into it, it may be almost over. It's a good time to let yourself be lazy.
2. Stop looking at, reading, and discussing financial news
The truth is that most of us can go for months or even years without looking at our 401(k) balances. Studies show that those who do so actually have higher returns. If you're in a bear market and struggling to hold on, make it easier on yourself by distracting yourself from it. It's a great time to let yourself be uninformed. Chances are you'll be glad you did in a year or two.
3. Sell a little
While selling ALL your stocks in a bear market is a major catastrophe, selling a little bit of them isn't going to hurt you nearly as much. If you think that selling off 5-20% of your stocks will allow you to psychologically weather the storm so you don't sell them all, then go ahead and do it. Just remember not to load back up on stocks in the next bull market. You've found your risk tolerance.
4. Hire a GOOD advisor
One big benefit of an advisor is to “hold your hand” during market downturns. An advisor who offers good advice at a fair price can earn 30 years worth of advisory fees by preventing you from selling out in a big bear. Of course, sometimes advisors have just as much trouble staying the course as investors, but in general, it's easier to stick to a sensible and reasonable plan when it isn't your own money being lost each day.
If you don't want to spend the money on an advisor, but still don't have a written financial plan or know how to write your own, consider taking the WCI Online Fire Your Financial Advisor Course. For a fraction of the cost of an advisor, you'll become financially literate and write your own personalized written financial plan.
5. Stop by the WCI Facebook Group, Forum, Reddit, Pinterest, and Instagram Pages
It can be very helpful for you to realize that many investors will stay the course just fine and you can too. The various WCI social media groups are a great resource for finding these like-minded investing peers. It's kind of like using the herd mentality to your advantage. Just realize that many posting on social media today were not investing in 2008 and are experiencing their first bear market. But, the vast majority will do the right thing, and reading some advice from them won't give you hypercalcemia as those TUMS will.
6. Remember that stocks are on sale
When big screen TVs go on sale the day after Thanksgiving, we all run out and buy them. When stocks go on sale, we all try to sell them. It makes no sense, of course. The companies that seemed so valuable a few months ago really aren't making much less than money now than they were then. Remember what you're buying when you invest in the market. As Baron Rothschild said, “The time to buy is when there's blood in the streets.” Some of the best returns I've ever had was the money I invested in late 2008 and early 2009. Remembering that fact will encourage me to avoid selling, to rebalance, and perhaps even to throw in a little extra money when the next bear market comes.
Plan now to survive CoronaBear and other bear markets to come. Just because you don't know when the next is coming doesn't mean it isn't.
How did you survive your first bear market? Did you use any of these techniques? Comment below!
Excellent post as usual. I don’t know if I would even turn to the Bogleheads in a big bear market. I recall a lot of panicked ‘plan B’ threads there in 2008-9. The fear was quite palpable even there.
The fear is very real. I did not sell in 2008/2009. I mitigated some of my fear by buying gold instead. I know gold is not a very good investment in general. I also assumed based on previous bear markets that my equities will return. But what if this one was different? Gold made me feel like I was hedging some of my bets. Who knows maybe I learned my lesson, or maybe I will buy more gold. What I know is that I will try my hardest not to sell equities, rebalance based on my rebalancing schedule, and continue contributions as scheduled.
Maybe also have an article on, what to do with your money when stocks are all time high.
Like, rebalance by buying bonds? 🙂
As a person who is brand-new to investing and finally earning money, I admit I check daily. When I see that I lost $xxxx in a day it does make me worry that I am doing something wrong and should do something else with the money. I think that uncertainty, most of all, is what has swayed our family to paying off student loans first.
There is nothing wrong with checking everyday if you do nothing about what you see. Remember they are fluctuations. Maybe checking everyday will get you used to them. Think when you have 1 million in equities and stocks drop by 2% in one day. $20K is a lot to lose in one day, but it is all part of daily noise and fluctuations. Just remember that you are in it for 20-30 years, not 20-30 days.
As for the comment above regarding what to do when stocks are at an all time high. The value of stocks today have nothing to do with what you do. You should do the same thing today as you would do in a recession. Stick to your asset allocation, keep adding money on your regular schedule and don’t care what the market is at today. Remember today’s high can very well be the low of a recession in 7-10 years. The market will reach many new highs during your investment career.
So wise you are, Alex.
May I ask your age bracket?
And how did the Au work out for you? (I hear so many anti-gold comments)
I’m about 40 years old, and gold is a poor investment. I made a very small unrealized profit. Buying gold is more a speculation than investment. I still own the 10 ounces I bought and ideally will not need to buy more ever again. I would have made a lot more money investing in the S&P
I bought gold then because I was worried that maybe this time is different. It was not.
Dr. Kahn: “Maybe also have an article on, what to do with your money when stocks are all time high.”
This is an interesting question that I have personally dealt with in two ways:
1. Remember that a market high today could be just another stepping stone to future even higher prices. Look at any 1900-present (or such) stock chart and pick out the crash of 1987. Not very impressive, eh?
2. When the market seems frothy, I do continue with my regular contributions to my equity holdings, but I have added minimum volatility funds to make me feel better about doing so. After all, it’s the volatility that I am trying to reduce, and academic studies have demonstrated that lower volatility indeed improves returns over time. I am using these funds as a “Jedi mind trick” to keep myself honest!
Jim,
Missed you at BH 13 this week; thought you would have been there. Boglehead here who funded his kids’ college funds (529s) at 3-4x my normal annual rate during the period of 9.09-3.09. Made a ton of taxable investments during that period as well. Had a bunch of cash waiting to put to work as a result of a condo sale about a year prior. Fortunes are made during chaos not during times of tranquility.
I haven’t had to deal with a bear market yet, but I have been thinking about it. I started my internship in 2008, so that’s when I started investing. The markets were down and I was fortunate enough to benefit from the subsequent bull markets. And as pure dumb luck, I moved my retirement accounts to Vanguard just before the recent correction, and implemented my asset allocation before the bounce back. None of this was market timing, just coincidence…not that I mind the nice returns.
Regardless, I’ve been thinking about what to do for the next bear market. I still plan on funding my solo 401K and IRA, just before tax time because that’s when I know how much I can put in. It serves as a good marker to invest/rebalance once per year. I’ll do that no matter what the market is doing.
What I’ve been afraid of is investing in a taxable account. The two competing interests–fear of investing a large lump sum that may go down in value significantly if there is a bear market vs leaving the money sitting in a money market account basically losing purchasing power because of the low interest environment and inflation (and potentially having my money out of the market if the bear market doesn’t come).
So what to do? My current thought is to hedge my bets and dollar cost average my money into the market (maybe 10K per month) over the next year. If the market goes down, I’ll limit the amount I lose, and I’ll be buying the market on the way down (at some point I’ll probably buy at the bottom). When the market rebounds (hopefully), I should be in good shape. Of course, since we can’t predict bear/bull markets, the markets could go up in the next year; then I’ll be limiting the amount I have in the market, and I’ll be buying on the way up. No plan is perfect. But I still think it’s better than just letting the money sit in a money market account. My TSP is basically dollar cost averaged in each month, and it’s done really well, so it’s seems like a decent plan. It’s just a matter of choosing what to buy; new asset allocation vs taking my retirement asset allocation into account? Thinking about it. Probably use ETFs for tax efficiency.
Either way, some money will go in lump sum (401K/IRA) and some will go in dollar cost averaged (TSP/taxable account). Best of both worlds? I think it will work with my risk tolerance. But I’m in no rush, gonna sleep on it for a while.
If anyone has suggestions, I’m all ears!
If you have stocks in your tax-deferred accounts, there may be a good reason to own individual municipal bonds in your after-tax accounts. Tax-deferred portfolios can be significantly different from taxable ones (because after-tax one should limit the use of high interest/dividend-bearing investments), so one way to diversify the stocks is with municipal bonds (whether mutual funds in the case of a balanced portfolio, or individual bonds if the goal is to have safe money for college, income for retirement, or just a relatively safe investment that can beat inflation albeit by a little bit).
You’re absolutely on the right track. Along time ago when I first started practice, a partner just getting ready to retire gave me some investment advice. He told me not to fall victim to buying apartment houses, rental condos, or business buildings or other alternative investments. He said to live my life and any money I had leftover at the end of the month to put in an index fund such as a Vanguard Index 500 fun. And that is exactly what I have done over the years.
By doing so I was dollar cost averaging each month, buying some equity high and some equity love never trying to predict a top or a bottom. I am 54 years old and most likely retire within the next year. I have $8 million of investable assets. All of which I have accumulated by investing the excess funds I had at the end of every month it is a Vanguard Index 500 and other broad equity indexes. It is not until the recent few years that I’ve diversified my holdings to include very fixed income funds to balance out my portfolio as retirement is coming soon. Keep up what you’re doing. You sound like you’re great saver and I’m sure you will reap great rewards by doing so. But also remember to enjoy life along the way. None of us are guaranteed 90 years.
How much did you invest per year on an average?
Khan,
The answer you are looking for is very difficult to calculate. Keep in mind that inflation exists. And a dollar invested 25 years ago is not the same as a dollar invested now. Just like 8 million today will not be the same as 8 million when you are ready to retire.
Remember your goal should not be X million. It should be to have enough funds to live off of without having to work. This is usually a certain percentage of your current income. This is because in retirement you should be out of debt, not have work related expenses, pay less in taxes, and you are not saving for retirement or college expenses. For many physicians can live of $100K/year without debt in a very comfortable retirement. That physician would need $2.5 million in savings (using the 4% rule.) If you take social security into account that physician would get another ~$30K/yr from social security cutting his needed wealth down to 1.75 million.
My point is this. Save upto what you need and not save to some fantastic magical number. You may reach higher, but at what cost. Is it at the cost of joy today? Is it at the cost of working instead of spending time with family? Is it at the cost of health? We must find a happy medium whatever it may be.
The way I assume my figures is that I believe and hope that the market will return 5% real (after inflation) and make my savings contributions that way. I created my budget based on saving that amount first, then paying my debt, then living expenses (house mortgage had to fit in that budget.) Whenever I have money left over I either spend it, or use it to pay off some of my debt. Since my rates are low <3% I am in no rush to pay it off, but if I have extra money just sitting around, it is more useful going toward low interest rate debt than sitting in a .01% checking account.
I hope this info helps.
Thank you for that comment.
I would say #1 is not just being “scared” but really a mix of fear and pain, and a big reason people sell is to stop the pain. As you say there is a visceral painful component to seeing your money lost every day, especially if you are new to investing, excited by it and following it closely. By getting out of stocks the pain stops temporarily, so even if it doesn’t make any sense long term it makes perfect sense short term.
I have a lot of respect for new investors that can stay the course, as I had to go through some losses and recoveries before I was able to.
Younger physicians should pray for a bear market, allows them to buy at lower prices.
Remember loss aversion is one of the most powerful behavioral traps in investing. If the investor is “running with the herd” and selling when the market is crashing, somehow this makes everything better. An investor must learn to deal with this emotion.
For the more senior physicians, take your asset allocation to lower equity exposure, maybe 30-40%. You must realize and accept that this will cap your upside potential. You can potentially raise your returns on this smaller equity allocation by tilting to small cap value and international stocks.
The only advantage a retail investor has is he/she is not forced to sell in a bear market. You must go to an equity exposure that allows you to stay invested and not bail.
In taxable accounts, tax loss harvesting is the cure for loss aversion. Allows the investor to off load his losses onto other taxpayers.
Bonds are for stability, not return.
I think an important point that maybe should be included in “why people bail out” is the fact that often during recessions, investors have no other choice and HAVE to sell. I traded client capital throughout the “great recession,” and it amazed me how many stories I heard of investors calling brokers and saying “I don’t care what the prices are, it doesn’t even matter, I need to sell out immediately and raise cash” to cover margin calls in other areas, or meet mortgage expenses on their spec houses, or pay for other unfunded liabilities. Recessions will force the over-leveraged or over-extended investors to sell at the exact wrong time (depth of the recession) for no other reason than they have to. DON’T EVER PUT YOURSELF IN A SITUATION WHERE MARKET ACTION WILL DICTATE YOUR BUY/SELL DECISIONS!!
Also, I find it interesting that people seem to be ok losing money during recessions, riding it out, and/or just “averaging down” or re-balancing. Please, look into strategies or approaches that actually do well during recessions or liquidity crises. I wrote a guest post a couple weeks ago about one specific way to achieve such diversification with trend following managed futures. There’s no better diversifier than finding something that makes money when all other traditional asset classes collapse. I’m guessing it’s rare, but I didn’t even feel the recession (and actually had positive gains throughout it) because we were properly diversified across stocks, bonds, and alternatives.
Do you have a link to this article about downside risk alternatives?
Let’s say you’re a soon to be new attending just getting into investments… where/what would you buy at these “lower prices” and how can I be sure I’m buying at a significantly “lower price”?
I would follow my written investing plan. If I didn’t have one, getting one would be my first priority.
But just for the sake of discussion, my portfolio would certainly include the Vanguard Total Stock Market Fund, purchasable in a Vanguard Roth IRA (often funded through the backdoor) or your employer’s 401(k) or a simple taxable/brokerage/non-qualified account again at Vanguard. It’s currently selling for about 20% less than it was in February.
Hope that helps.
Dude, you are going to be a rich person!!! already reading WCI and not an attending yet!
Just like Jim said, get a financial plan do his Fire Your Financial Adviser Course I did it was awesome.
But for now would recommend when you become an attending contribute to your work 401K if you have one and can contribute in a low cost total stock market index fund as Jim mentions, though your employer may not offer Vanguard funds so any lost cost alternative is fine. My work 401K has Fidelity funds and the closest thing they have would be the Fidelity S&P 500. Also as Jim mentioned about a backdoor Roth would be great to do once an attending which he does have great articles on this website on how to do. Vanguard is very popular to go through to open the Roth IRA and traditional IRA, as well as great to set up a taxable account at Vanguard, though I use Fidelity which is awesome as well.
After you take Jim’s course, you can really narrow in on your risk tolerance and maybe buy a bond fund or other assets. For now though stocks are on sale so investing 100% in a total stock market index fund is a great idea!
Also don’t buy whole life insurance- ruined my whole financial life and is reason I read WCI in the first place which saved me from this grave mistake.
A 7th reason to consider: Not having a real emergency fund.
Since I wasn’t investing in 2008, it has been amazing to pay attention to and learn from a live bear market. One important observation is that during this (and other) bear markets, not only do stock prices tank, but people’s jobs and sources of income dry up simultaneously. Add in the sudden hiring freezes that are being enacted, and you can be in REAL trouble if you did not save up a proper (6-12 month) emergency fund. The solution to these simultaneous problems are to sell investments at a massive loss, if you’re lucky enough to have money in investments.
In this bear market, I am recalculating my true emergency fund needs and will change my previously relaxed attitude towards it.
Excellent point.
Dr. Dahle,
On the topic of your final point about “buying stocks on sale”, and in regard to your stock buys in 2008-09, did you tend to over-rebalance with the intent to “repair” the imbalance later? I tend to stick to your advice about staying within my written investor policy statement, although I had never previously considered over-balancing to take advantage of stocks on sale, thus it’s not addressed in my personal plan. My target asset allocation is 80/20 stocks/bonds, yet I wondered how far you had ever deviated (back in 2008-09) from your target in order to take advantage of the opportunity.
I always have leftover cash at the end of the month to invest, and my target allocation would push me to put the cash into bonds now, although I’d to miss the chance to buy stocks while on sale.
Does it seem reasonable to push up to something closer to 90/10 temporarily, with intent to ease back into 80/20 with future contributions after the CoronaBear recovers–assuming the allocation doesn’t fix itself on its own?
Thank you kindly,
Casey
I don’t think I ever really succeeded in overrebalancing in 2008-2009. I did rebalance and bought all the way through though. My plan also doesn’t tell me to overrebalance. If anything I was probably underrebalanced just because I don’t move that fast.
Yes, that’s reasonable but your written plan needs to dictate exactly what the indicators will be for you to make adjustments and return to the original AA. “At 40% down we got from 75/25 to 80/20 and when market returns to its previous high we go back to 75/25” or whatever. Just make it automatic and written and non-emotional.
My best investments were also the index funds I bought when everybody was selling, (2008-2009). It’s hard to stomach at that time because whenever I put in more money, it becomes less the next day, it doesn’t help when I talk to my colleagues, they say how they were able to sell right before the crash, I even felt ashamed to tell anybody I was buying, but I felt like I was doing the right thing and sold all my bonds to buy more stock index funds.
During this crisis, I’m a lot calmer than last recession, I’m still very heavy on equity, not panicking even after my record single day 7 figure drop, this SORR is within the calculations before we retired last year.
First bear market, man it’s interesting. Regarding the last point: “The companies that seemed so valuable a few months ago really aren’t making much less than money now than they were then”
Is it really different this time? Many companies are no longer as valuable and certainly making a lot less money than before without a clear road to recovery. Hopefully new companies will rise up and take their place, but whole sectors might change and how long will it be before service employees retrun in full force. Lots of things may never fully return if this becomes seasonal: football stadiums, crowded airplanes, the world series of poker?
I hope this too shall pass, would be a great topic for the forums, but all speculation until we get farther down the (bumpy and uncertain!) road.
Varies by the company obviously. Yes, many/most are making less now than they were a few months ago, but how much less are they really going to make over the next 10 years. 20% less? Really? Probably not.