LAST YEAR WAS MY first bear market. I’ve been thinking a lot about it and about the astonishing stock market recovery that followed, so I’m better prepared for next time around. Here are three lessons I learned in 2020:
Lesson No. 1: Buy aggressively when markets fall. When the market crashed last February and March, I invested more in stocks. But I regret not having invested a lot more, despite having cash available. In hindsight, I should have been much more aggressive. Even though I had set myself some guidelines about how much to invest in a bear market, I was worried about “catching a falling knife,” as Wall Street pundits put it.
True, this was one of history’s fastest recoveries after one of the quickest crashes, so there was little time to react. Yes, stocks could have taken longer to rebound. Still, I shouldn’t make excuses: I have decades of investing ahead of me and a market that’s down 30% is already a great buying opportunity.
Lesson No. 2: It’s tough to stick with what you know when emotions run high. “There’s a difference between knowing what you’re supposed to do, and actually having the nerve to do it in the moment,” writes Maria Konnikova in The Biggest Bluff, where she details her journey to becoming a professional poker player.
It’s one thing to know the strategy and a whole different story to be prepared mentally, she says. I knew the theory: When the market falls, you should double down. But with the whole world apparently going crazy and stocks falling at unprecedented speed, it was harder than I expected to stick with what I knew was right. Indeed, with the stock market plunging day after day, it was difficult enough to make my regular investments, let alone buy more.
How we feel affects how we act, says Konnikova. To guide my actions, I now have a written plan to refer to, which includes specific actions to take at certain times, regardless of my feelings. I’ll also have this article printed out to review, in case I have second thoughts about acting. Will this prevent me from sabotaging my own strategy? I can’t say for sure, but it’s better to have a plan than no plan at all.
Lesson No. 3: All-time highs are a great time to invest. When I started investing, I chose actively managed funds, because I was worried about the S&P 500’s rich valuations. The roaring bull market that started in 2009 surely had to stop at some point, I told myself. And with financial pundits saying U.S. stock were overvalued, I didn’t feel at ease buying index funds and hence indiscriminately purchasing a broad swath of the stock market, with no regard to each company’s valuation.
I’ve since changed my mind. Last August, J.P. Morgan published research analyzing the S&P 500’s return if you invested at all-time highs and comparing those results to what happened if you bought on other days. The counterintuitive conclusion? Buying at all-time highs has historically led to better performance.
Marc Bisbal Arias holds a bachelor’s degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows. Follow Marc on Twitter @BAMarc and check out his earlier articles.
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Buying during market lows works great. I did this in 2008-9, in 2011, and in 2020, and got very good returns. But the difficulty I have is figuring out when/whether to hold money out of the market so as to have cash available for buying during a future low. Actually, I’m having that problem right now.
As soon as you mentioned “hindsight” you lost me. The point is that we have no hindsight at the moment. As another noted, the market could have kept on falling and you would have looked like a genius by not investing. The best plan of action is to have a plan and stick to it. Even a poor plan is likely better than one who keeps changing their investment plan based on the latest new trend. For investing cash, I’ve seen investment plans such as “for every x percent drop in the market I will invest y percent of my cash,” which seems a sensible plan of action if you have a lot of cash to invest.
Is this the right strategy for the average investor as opposed to regular, steady investing over many years? I can see some 401k participant trying to time the market moving funds around.
I think it’s important to distinguish market timing from buying the dip. The former puts you firmly in the prediction business, a dangerous place to be. The latter involves reacting to market moves — which is what you do when you rebalance.
Isn’t any investment in the market based on the prediction that one will earn a positive return?
I understand how buying the dip can be considered rebalancing–at least to the extent that it gets one back to their target equity allocation. However, this article also recommends buying at all time highs which requires increasing one’s equity allocation. Do you agree with this advice?
It seems that one could decide to purchase or sell stocks based on numerous market moves. Surely, at some point, you must agree that this is timing the market.
I think there are two separate issues here:
1) If we’re regularly contributing to our stock market investments, we shouldn’t be worried if the market is hitting all-time highs. Because stocks rise over time, all-time highs will be a common occurrence. Marc is simply saying you shouldn’t be nervous about making such investments. He’s not advocating that investors make a point of investing at all-time highs and not at other times.
2) Marc is also saying that market declines are a good time to step up your stock purchases. We should do that as part of regular rebalancing. Should you invest even more in stocks when the market declines — and potentially end up overweighted in stocks, at least temporarily? Purists may consider that an investment sin, and they may be right. But I can think of far worse sins.
None of this sounds like sane advice. I would submit you didn’t go through a bear market, just a large drop and subsequent recovery. For those of us that are old enough to have actually gone through a bear market, some of your suggestions will produce painful consequences.
What doesn’t sound like sane advice? Last year, the S&P 500 dropped 34%, right in line with the bear market average. Why wouldn’t that count as a bear market?
This article and your comment both caught me by surprise. Yes, I guess I did realize that by definition the S&P drop qualified as a bear market. I just checked and the length of this particular bear market was 1 month! I guess I had focused on the 1 year performance of the markets (S&P, NASDAQ) and with all that other stuff (pandemic) going on I honestly had forgotten the depths of the dip. An unintended plug for buy and hold investing, I guess.
Taken together, I would argue that your points imply that one should simply allocate the absolute maximum amount he or she can afford to invest in equities and let it ride. Buying during selloffs and market highs implies that one has money sitting on the “equities sideline.” Thus an evaluation of the benefit of following the advice in this article versus a buy and hold approach should factor in the gains forgone by having money available to time the market.
We were all very fortunate that the market rebounded as fast as it did under the circumstances. Certainly the fed pumping a massive amount of liquidity helped, which over time (government debt) may pose a major problem.
I guess it would depend on your situation, the last thing you’d want to do is take all your personal liquidity and dump it in the market while it’s down. It worked splendid this past flash crash/super speedy bear market, but what happens if the market has a prolonged bear market, and several leg downs which history has shown to happen. Buying the dip doesn’t hurt, but I think there is a balanced approach that one should follow.
I try to follow an even simpler strategy: invest as much as I (responsibly) can as soon as I can.
I’ll admit I didn’t follow this strategy perfectly in March. I invested some cash I had available over the course of two weeks rather than in a single day. Next time I’ll try not to hesitate.
If I had decades of investing ahead of me, had excess cash available, a secure job, and a decent sized emergency fund, this will probably turn out to have been an excellent time to invest aggressively in equities. And in “hindsight”, we all probably wish we did. But since I’m a few years from retiring, I’m not sure I would have been able to pull that trigger in March 2020. I didn’t stop my regular investments and even added a little to my regular 401k contributions, but I felt in my position, a little caution and patience would serve me better.
I think these are all helpful insights within the proper context.
Lesson 1: I think there needs to be nuance in this discussion. Buying aggressively is fine, assuming you have a margin of safety. Keep in mind that stocks can go down 30%… and then go down 30% more. Also, it can take years to recover, rather than mere months. If you lose your job in the downturn, you might need several years of cash/fixed income to avoid liquidating your home or other assets. Your emergency fund and fixed income assets need to be enough to get you through the long dark night, so you can last to the sunrise.
Lesson 2: My answer to Lesson 1 and to Lesson 2 is that I rebalance when my stock to bond ratio swings by more than 5% (i.e. from 80/20 to 75/25, or to 85/15.) This has me buying low and selling high most of the time. It had me selling bonds and buying stocks at the precise low in March (pure luck on the timing.) I have several funds, but I focus only on stocks vs bonds: correlation of all assets tend to 1 in a market crash, but debt (especially treasuries) takes it’s own path. There are other approaches, and other ways to do this, but I agree with you that a specific (written) plan is best. Letting emotions dictate your actions increases your risk tremendously. I say this as someone who has done so and succeeded (in 2008), but then realized I was playing with fire.
Lesson 3: I think the real lesson here is not to fear ATH’s. The best time to invest is now.
When I set up my portfolio Apple was 5% of it . Since that time it has grown to over 75% but I cannot bear to sell any of it. Had I done that I would have missed out on two huge stock splits and thousands in dividends. I get what your saying though. But I think with company like Apple I am leaning more towards Buffets thoughts on it : he treats his apple shares as one of the businesses he owns not as a stock . Thoughts?
Congratulations on hitting the Jackpot. I think over the last 15 years a lot of popular opportunistic purchases like Apple have worked well. You might want to read what Bezos has said about how long his company might last, if you haven’t already. It ties in with Jonathan’s questions and gives one some things to think about. You are carrying a lot of un-diversifiable risk. I’m not sure you recognize how great that risk is.
If you want to invest like Buffet, you might want to ask yourself what your margin of safety is? Why one company is 75% of your portfolio? (Hint: What is the value of their assets compared to their total capitalization? Even including intangibles?) If you don’t know off the top of your head, you might want to consider his advice to people who don’t have in-depth knowledge of the market. How much do you read about investing (WSB doesn’t count)? How much do you read to explore other fields of knowledge?
Assuming this investment is taxable, I would want to talk to a CPA about how much I could sell each year and keep taxes minimized. I’d want to sell more than half of it over the next 5 years or so and invest that in diversified index funds that cover the Global or at least the Total US market, plus a few treasury bonds on the side. That’s not advice, that’s just what I would do.
But that’s me. The question is what do you want and need? If you’re going to have a pension that pays for your retirement, maybe you have more ability to take risks. You really need to assess all of that.
Index funds are a few winners and many losers. When you have the winners forget the losers. Enjoy the winnings.
History tells us that all great growth companies eventually slow. So, too, does logic: If a company grew faster than the economy for long enough, it would become the economy — not a likely scenario. The question is, will Apple slip gracefully into corporate mediocrity without taking a big stock price hit or will shareholders suffer the radical revaluation that often happens when that mediocrity sets in? I don’t know the answer, and nor does anybody else, but I would ask yourself what the latter scenario would mean for your financial future.
I have been investing in individual stocks for 30 years. It is hard for me to buy stocks at the bottoms, even though I know I should. I generally wait until things start to look up a little. I bought stocks in the second half of 2009, when there were still many good buys, and last year I bought in April and May, after the market started to recover. There was still plenty of upside at both those times.
I thank Marc and Jonathan for helpful points—these markets crashes are great opportunities to buy solid funds at discount prices. In 2008 and March of last year, several Vanguard funds dropped 40% to 50%. Rebalancing into these funds is a no-brainer, they all recovered rapidly to pre-crash highs. Meanwhile Vanguard active funds rewarded buy and hold—international growth fund went up 60% for the last 12 months—broad diversification keeps participation in this safe, especially with recent re-balancing back towards bonds.
Hindsight bias? The Dow was at 7,939 in Dec 1965 followed by a long decline to 2,160 in July 82, and didn’t surpass its 1965 high until 1995.