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The Psychology Of A Bear Market

The Psychology Of A Bear Market

| July 08, 2022

During Times of Market Stress, Your Behavior Matters Most

Inflation is at a 40 year high. The Nasdaq is down more than 30% as of mid-June. The S&P 500 is in a bear market. Bonds have offered no support this year as bonds - the part of the portfolio that investors EXPECT to offer relief in times like this - are down more than 10%. Yikes!

Let's make no mistake about it. What we are seeing in markets right now is something that has not been seen by investors in over 40 years. Looking back further however, there have been similar periods we can look back to for insights as to how we can best position ourselves.

The one thing that doesn't change: It's investor behavior that matters most during times of stress.

Make adjustments as necessary, but stick to your long term investment strategy

Keeping your emotions out of your investment strategy is often easier said than done, but the chart on the right highlights the importance of sticking to your long-term plan.

Since 1927, the market has had 71 positive years and 25 negative years. Markets ended the year down more than 20% only 6 times over that period, and in 5 of those instances, the market had gains of more than 20% the very next year.

Things may very well turn out differently this year, but history shows that those who lose their nerve in bear markets usually end up missing out on some big market gains soon after.


Control what you can, sharpen your pencil if you are in retirement or pre-retirement

If you are in retirement or getting close to retirement, this market environment has been particularly unnerving. Aside from commodities, which have been structurally under owned by most investors for years, there has simply been nowhere to hide.

Sequence of return risk is real for those entering or in the early years of retirement, as selling investments at a loss to cover necessary expenses can be disastrous for your long-term portfolio.

As part of prudent financial planning, we would strongly recommend that investors currently in, or entering, the distribution phase of their plans focus on controlling what they can: revisiting spending needs, the withdrawal sourcing strategy and how the investment portfolio can be structured to better meet those needs in a changing environment, are all important conservations.

Develop a "Smart Money" mentality: Buy low, sell high remains investing's golden rule.

A recent survey found that the majority of individual investors would sell in response to the S&P 500 falling 10-20%. On the flip side, a majority of institutional investors - commonly known as the "smart money"- would be buying in response to a 10-20% drop. We never advocate for market timing, but having a sensible plan for how investors can take advantage of potential market dislocations and volatility begins to shift behavior in ways that are more conducive to long term wealth creation.


Your behavior during times of market stress is what matters most. Stick with your plan. Control what you can. Develop a "Smart Money" mentality.

Here are things we take into consideration when managing your money >


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stock investing includes risks, including fluctuating prices and loss of principal.?

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.?

investing involves risk including loss of principal. No strategy assures success or protects against loss.

The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

1. The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Bloomberg Aggregate Bond Index or "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

2. Reactions to a decrease in the S&P 500 across three groups between 2015 and 2017 (2015 and 2016 for advisors).