Things to Consider In a Bear Market

This episode of ThinkSmart is jammed-packed with ideas on coping with the current bear market. There is always uncertainty in the marketplace during these times and there are no guarantees but there are precedents. Could it get worse? Could we see a repeat of the Great Depression? The truth is we never know where the bottom of the market really is. Would you feel better if you made some changes to your portfolio? Find out today what will lead us out of the bear market and the many potential investment strategies to consider.

Key Points:

Bear Market Strategies

When Should I Buy?

Rising Interest Rates

Dollar Cost Averaging

How Far Will the Market Fall?

Could it get Worse?

Transcription

Rob (00:00):

Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management, and this is Think Smart with TMFG.

Rob (00:11):

Today on Think Smart with TMFG, Mike and I are going to be discussing things to consider in a bear market. Mike, we know we’re in a bear market. We’ve been talking about this for numerous podcasts. And I always think it’s a good thing to… What are some of the questions that people are thinking about when we’re going through this? I mean, again, a bear market is defined is when the markets are down more than 20%. We’ve been down more than 20, it pulled back a bit. We’re down even more than 20 now, and it appears not to be ending anytime soon.

Mike (00:48):

And bear markets are… They’re related to, but they’re not the same as a recession. A bear market may or may not result in the recession. And you don’t know that till later. People tend to confuse the terms and think they’re the same things and they can be different too.

Rob (01:01):

So let’s start reviewing some of those questions. And I guess the first one, maybe it’s not the first one on everyone’s mind, but it almost should be. Is this a good time to buy?

Mike (01:11):

Better than the year ago, isn’t it?

Rob (01:12):

Well, the market’s down 20%.

Mike (01:16):

Yeah.

Rob (01:17):

Will the market come back?

Mike (01:18):

Well, we know the market will come back eventually.

Rob (01:21):

Okay. So if the market’s down 20%, how will the market come back? Probably within a couple of years?

Mike (01:28):

Oh, absolutely.

Rob (01:29):

So in other words, if it’s down 20% and it’s going to come back that 20%, I could earn almost 10% a year.

Mike (01:38):

Yeah.

Rob (01:39):

That’s a pretty good return.

Mike (01:41):

I guess the uncertainty’s always there, isn’t it? And that’s the painful… People always want you to say, I can guarantee on this date, it will be worth 30% more. And that uncertainty drives people crazy, because everyone wants to guarantee with everything, don’t they?

Rob (01:55):

Okay. So, what about if it’s three years?

Mike (01:59):

Yeah.

Rob (01:59):

What would that return be? Maybe 6% or 7% a year for three years. You’d be back?

Mike (02:04):

Yeah.

Rob (02:05):

That’s still a pretty good return. That’s certainly a lot better than cash and bonds are getting you today, or Gold, or Bitcoin, or even real estate.

Mike (02:14):

Yeah. Could you imagine if we could offer a 10% of your GIC, which we know doesn’t exist right now, but people would be lined up down the street. But the problem is the G in that GIC, it’s a guaranteed investment certificate. We’re just like a hope for what’s going to happen. But generally speaking, when you look at those hopes and look at the past and history behind it, it’s pretty obvious, those returns do happen in the future. It just, there’s no guarantees to them.

Rob (02:41):

So the question is that, is it a good time to buy? It’s absolutely a good time to buy. Could it get worse? Absolutely. But regardless, it’s a good time to buy, because it’s 20% less than it was. And markets always come back. Is it a good time to sell?

Mike (02:56):

Probably not.

Rob (02:56):

But I’m nervous. I mean, we’ve got a possible recession coming on board. We’ve got high inflation, we’ve got global warming, we’ve still got a war going on.

Mike (03:09):

Again, I guess the problem is if you sell to take advantage of sell, when you’d have to buy back it eventually, wouldn’t you?

Rob (03:15):

You would.

Mike (03:16):

And when are you going to do that? Are you going to do that when things are worse, you can be scared now. And all of a sudden everything gets really bad when we’re in recession and we drop another 20%, are you really going to have the guts to go and buy in that type of marketplace?

Rob (03:30):

But I guess, the advantage of selling, then I know exactly how much money I have-

Mike (03:33):

And how much you lost.

Rob (03:35):

Or how much I’ve lost from what I had.

Mike (03:38):

You not know it how much you got to lose.

Rob (03:40):

And our experience has been that you’re never going to recover that amount that you lost. So, if you had a million and you’re down say 12% today, you’re down $120,000. That $120,000 is probably gone forever. In other words, you might get that money invested later on and it does get back to its million, but you missed out on $120.

Mike (04:03):

You’re always going to be $120,000 less than you could have been.

Rob (04:05):

Definitely. Another question that I think… Are we at the bottom?

Mike (04:10):

That is a hard one. Yeah, I find when you go through these markets, you have the big drop of the bear market. And we’ve seen in the past where you have a double drop and things like that. But a lot of times, it gets more volatile. It gets that lower point. Doesn’t really get the bottom, it’s just a lot of volatility. Up 700 points, down 800 points up. It’s a lot of volatility near that bottom, but who knows?

Rob (04:33):

I think the difficult part about the bottom is again, you have to know the future. And as I’ve always said, you can’t predict the future, so if you can’t predict the future, how are you going to predict the bot? At some point, it’s going to feel like a bottom, and the bottom eventually catches.

Rob (04:49):

But sometimes that bottom can be further. If you’re out fishing and you’re throwing out an anchor and you’re always trying to catch the bottom, so that the anchor will hold. Well, sometimes it drifts even a little more and you have to restart again. And investing is very much like that. It’s like you’re dragging that anchor across the bottom and eventually it finds the bottom and starts going back up again. Should I change my portfolio? I would feel better as an investor if I actually went and did something.

Mike (05:22):

I guess, like what are we talking about, should I buy or should I sell. Changing the portfolio is really a buy/sell decision, isn’t it? Essentially, right? And if you’re going to change your portfolio and decide to buy at the bottom, you’re going to move more toward equities. And some people who are in a situation where they do want to get a little more aggressive portfolio, this may be a good time to do it when you’re in a down market.

Mike (05:48):

They’ve been thinking about for the last couple years, but they thought everything was too expensive. So this can be a good time to get more aggressive. Time to get more conservative, that’s a sell decision. That means you’re going to sell your equities at a low marketplace.

Mike (06:00):

And again, you should get more conservative in strong markets, and you should get more aggressive in weak markets. But it’s the opposite of what you feel like doing, so changing portfolio can happen. But again, if it’s knee jerk reaction to safety right now, it’s probably not a good move.

Rob (06:17):

Next question, how much further does stocks have default? We’re in a small bear market right now. A bigger bear market is a drop of 30% plus. And there’s been 13 of those, since they’ve been tracking it since 1926. So there’s a chance that we go to third, so it could get a little worse. But there’s just as much chance that it stays where it is and starts getting better tomorrow.

Mike (06:44):

Yeah. It gets scary when we go through… We have been walking our clients through some of the bear markets in the past, and it’s scary how bad some of them got. I mean, I think 2007, I think was down… Was it 53% at one point?

Rob (07:01):

Yeah. Yeah. 2000 into 2008, we were down 53%.

Mike (07:01):

53%. That’s pretty scary bear market. I don’t think people realize how much trouble the world was in at that time. In hindsight, when we talked to people in the financial industry on how close the world is into a massive breakdown, it was just on the brink. And I mean the time before that, when you go back to 1929, and that was I think an 80% correction.

Mike (07:20):

But again, in history, we realized there was no controls. There was massive amounts of leverage. The banking system was almost nonexistent at that time. And we hope that the government has enough controls and how they do things now to make sure that’s not going to happen again.

Mike (07:35):

You never know, but they have a lot of systems in the place to make sure we don’t end up in some of those same situations. Control is on leverage. You can see right now, as things are running away, the government’s raising interest rates. They could just let things go and let the market go nuts. They’re trying to control that and bring it down to a normal level by controlling the money that’s available in the system.

Rob (07:55):

And it seems to be working. It’s had an impact almost immediately on housing prices. So that’s a sign that this raising interest rates is good. And we all know, especially in Canada, housing prices were out of control. They were going out far too quickly. Next question, how long do bear markets last? What’s the research?

Mike (08:14):

I think they’re out a year. Somewhere around that.

Rob (08:17):

In 10 months? 10 months is the average. Sometimes they’re longer, sometimes they’re three to four years that you can be in this choppy period for three to four years. But we always know they end.

Rob (08:27):

We had a really short one back in 2020 when COVID first hit. It was three months. That’s a short bear market. This one, if we’re 10 months, we’re only what? Four months into this. So there could be another six months just to hit the average.

Mike (08:43):

And the bull markets are much longer, much, much longer.

Rob (08:45):

Now they’re years.

Mike (08:47):

Yeah.

Rob (08:48):

Another question, we’re in a bear market. Well, what’s the best bet to outperform when the market does turn around? Is it the stuff that dropped the most or what’s going to lead us out of this bear market? Something will, what will it be?

Mike (09:04):

When you look in recessions and you see what usually takes off, usually small caps are the leaders of everything. They adjust very quickly. I always think of big companies like a cruise ship. You know how a cruise ship has to stop, they have to stop before port about 20 miles out because it takes so long for them to slow down. And when they start going, it takes them 20 miles to get to speed. And when you see someone like a small cap, it’s more like a jet ski. They can stop on a dime and as soon as they hit the gas, they’re going.

Mike (09:32):

So when you find these bigger economic turns that you go into recessions and that, the ones that can make quick adjustments, of course, they’re going to be hit first as small caps as things come down. But when you start to come out of a recessionary period, if we do end up going through a recession, those small caps have made all the adjustments and start to make profits very quickly. And it shows right up on the balance sheet, and they improve quickly.

Rob (09:53):

So it sounds like we probably should invest money. Sounds like a good time to be a buyer. So the question then comes to how should I invest if I had a lump sum in a bear market? So, why do people come into money? Maybe there was an inheritance, maybe an uncle or a parent passed away and they inherited money. Maybe they received a large bonus. They may have sold their house or sold their cottage, an investment property.

Rob (10:20):

So lots of reasons why people come into money or they may have just sold out an investment. And they now need to figure out what to do with that lump sum. The issue becomes, you don’t want to screw up that decision. Even though it came from somewhere like a house, let’s say it’s $1,500,000. If you’re putting in the market, you weren’t concerned about a $1,500,000 house, but you’re really concerned about the $1,500,000 going into the market.

Mike (10:45):

Yeah.

Rob (10:45):

What’s the difference? You were in a housing market before, now you’re in a stock market.

Mike (10:49):

It’s a conversation with someone, because we always looked at, but they sold the house for their parents. And of course, it went in the market. I would look at the markets, they did it in October. So it wasn’t great timing on doing this right? And we went in there looking at the portfolio, we may already made a big mistake.

Mike (11:04):

I said, “Well, if you held onto the house, which would’ve been the bigger mistake.” And we looked, “Well, no, it’s a lot better than holding onto the house.” They would’ve held on the house, it would’ve been hard to sell. Number one, it’s worth 20% less to 25% less, plus it would be very difficult to sell right now because it is not moving.

Mike (11:20):

So even though the market has not been a good experience, probably over that period of time down by 10% in that range, way better than being in the house. So you got to look at both those sides.

Rob (11:32):

The other piece to that is… And we’ve always talked about this is houses don’t get priced every day. The stock market gets priced every second, so very, very different. So yes, the stock market is more volatile because we price it every second.

Mike (11:46):

And with the reality of this, their parents had a home now and they need $6,000 or $7,000 a month to pay for the home. That house wasn’t going to pay $6,000 or $7,000 a month. Can’t do it.

Rob (11:57):

It. So let’s go back to the lump sum, put it all in at once or spread it out. And so, a gentleman wrote this great book, Nick Maggiulli, and part of the book, there’s a chapter called That Affinitive Guide to Dollar Cost Averaging Versus Lump Sum Investing. And I won’t go into the details, but dollar cost averaging is essentially, let’s say you had this $1 million to invest and maybe you’re going to invest that over 12 months or maybe you’re going to put it in over five years. And she had put a set amount of money in over that five-year period. Or do you put the whole $1 million in right away?

Rob (12:39):

And the evidence basically says, 70% of the time, three out of every four years, looking back in history and he’s done all the research on this, you were better off lump sum it in just to put it in. So you and I always believe in factor investing because you’re putting the odds in your favor. It doesn’t always work out, but you’re always putting the odds in your favor.

Mike (13:07):

Yeah. Remember we asked Fama this question years ago. And Eugene Fama, Nobel Prize winner, he’s worked alongside DFA for years. And we asked him this question and he’s such an intelligent man. He goes, “Well, let me get this straight. You have two advisors. One has the right strategy, both have the right strategy for the client. Let’s go get them through the rest of life. One’s going to go and put it into place right away. And the other was going to wait to make them go in the right strategy. Who was the better advisor?” Said, “If you had the right strategy, why would you make someone wait and had them in the wrong strategy for whatever period of time? It doesn’t make any sense.” To him, it almost wasn’t even a question.

Rob (13:44):

So there is a period of time where the dollar cost averaging strategy delivers better performance. And that’s what we’re looking at. Which is going to deliver the better performance 10 years after?

Rob (13:56):

And that is actually, believe it or not, during a market crash… And if you knew that the market crash was coming, and you put in a set amount every month for the next… How long that crash happened, you’re going to come out further ahead. The problem is, look at us today, we’re already down. We’re already in a correction. We’re in a bear market. We don’t know that this is going to continue, so are we at the bottom? We just discussed we don’t know that we’re at the bottom.

Mike (14:27):

Yeah. The tricky part is if you do decide dollar cost average, you have to root for the market’s do terrible. Your goal is to lose money on your first dollar. It’s very hard to root for the markets to go down, because you already lost money on your first, but that’s the only way where dollar cost average is going to work. If your first investment was a bad investment and you’re making other ones that are making up for it along the way. So it’s a very weird mindset when you have dollar cost average into it.

Rob (14:52):

It’s also not linear. And what I mean by that is, so you put in… Let’s say, you’re going to do $1 million, you’re going to put it over 10 months. So you put your first $100 thousand dollars in right away. You go to put your next $100 thousand in 30 days from now. And the market may be up from where it was, or it may be down. If it’s down, you should be happy, but you’re putting another hundred in, I guarantee you’re not going to be happy. Because your first hundred might only be worth $90,000. And now you’re going to throw another hundred at it. You’re scared to do it.

Mike (15:30):

It’s not a bad system. But you got to understand what you’re doing is you’re managing regret. That’s the purpose dollar cost average, your management regret. There’s a regret if you put a big sum of money in, and the market goes down. So it’s not a financial decision, it’s managing your feelings and regret over things.

Mike (15:48):

But it’s not a terrible thing to do because emotions are a big part of investing. So it beats wade till the markets pop up to go do it. It’s a much better strategy than that. So ideally speaking, you put the money in right away, but if you want to manage your regret, dollar cost average, it does work very well and at least gets the money into the market over a relatively short period of time.

Rob (16:09):

So if you had that lump sum to invest, let’s review the four options that you have. Option number one, put the money in. It’s clean, it’s efficient. We know the market’s down more than 20% and we know that it will give you the highest probability of a good outcome 70% of the time. So that’s number one.

Rob (16:32):

Number two, dollar cost average over a specified interval. So you could put 20% of your money in over the next five months, or 50% over the next two months, or 10% over the next 10 months. There’s numerous possibilities there. In fact, there’s endless possibilities and that even makes it more complicated.

Mike (16:54):

Yeah. There’s no scientific proof to anyone being better than the other either.

Rob (16:58):

You could do the middle one and that’s where you go put the half the money in right now. And then maybe you dollar cost the other half. That feels a little better, right? It’s more balance approach. We know it’s not the best approach because 70% of the time, you’re better to put the money in. But at least you put half the money in.

Mike (17:18):

Yeah, I had client do that a month ago. It worked well. At least we got some in, we’re trying to take advantage of down markets. And remember dollar cost average, it works best in the highest markets when everything’s good. So it’s funny. It’s not the greatest thing when you’re in down markets dollar cost average in. If you’re in a really high market, that’s when dollar cost average is the right idea, because you don’t want to put all the money in a high market, have it go into low market.

Mike (17:43):

So dollar cost average works best when you’re in a really high market, everything’s doing really well, is I’d rather dump that lump sum in that time it’s going to go down. So again, you’re rooting for a market correction.

Rob (17:53):

And I guess the other strategy you could attempt, although I just think it would be ridiculous, is to try and put money in when the market is down. You’re trying to time each day’s purchase. You have the money just sitting in cash, ready to go and, “Oh, it’s down 200 points today. I’m going to buy today.”

Rob (18:11):

I think that strategy would probably be the worst one because it’s really not a strategy. Long in the short of it, it doesn’t really matter which strategy you choose, as long as you stick with it and don’t deviate from it.

Rob (18:24):

Don’t stop investing just because you dollar cost averaged in for five months and it went down. That brings us to the end of another week. This is Rob and Mike with Think Smart from The McClelland Financial Group of Assante Capital Management, reminding you to live the life that makes you happy.

Assante Capital Management (18:43):

You’ve been listening to The McClelland Financial Group of Assante Capital Management Limited. Assante Capital Management Limited is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate And Insurance Services Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information. Please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Estate Management Limited.