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How to Be Bear - Savvy When Saving and Investing Matthew Clay, Managing Director, JRWA
Financial Advisor, RJFS
October 2017

Most of the advice the wildlife professionals offer on how to protect yourself from a bear attack would not likely serve you well in the event of a “bear-market” attack.

  • Try to stay calm. I don’t know about you but seeing a grizzly bearing down on me is likely to cause an immense amount of panic.
  • Make a lot of noise. Go ahead and make noise, but even CNBC Mad Money host Jim Cramer’s screaming won’t fend off a bear-market.
  • Carry bear pepper spray. A nice first line of defense against a charging grizzly but unlikely to intimidate a bear-market.
  • Do not climb a tree. I’m honestly not sure what the investment equivalent of a tree is but if someone knows of an investment tree that bear-markets cannot climb please let the rest of us know.
  • If attacked, don’t run, curl up, protect your head, and play dead1. This perhaps is sound advice, especially for bear-market. Running is the equivalent of selling while stock prices are falling. Yes, protect your head. Keeping your senses about you will help you realize that historically there has often been long upward rising markets following drawdowns and declines.  Furthermore, even if you think your portfolio’s “dead” don’t fret, pretty soon that bear market will wander off as well.

When it comes to positioning your portfolios for a bear-market it is actually pretty easy to protect yourself IF you know when it’s coming. It’s also really easy to position yourself to be well rewarded in a Bull Market Run IF you know when it’s coming. If only market timing worked. Market timing has been tried and tested but I would say is a tired tradition that is ineffective and doesn’t make for a very good investment strategy. Why? Investors, including advisors and professional investment managers who try to time the market have a very poor history of successful outcomes.

Markets are very difficult, if not impossible, to predict. Furthermore, it is very difficult to try and invest your way around a bear market.

What is a bear market anyway? Typically, a bear market is defined as a 20% or more decline from a recent market high. A drawdown more than 20%? Wow, the thought of that probably makes your stomach churn and can be difficult number for most investors to “bear” (OK, pun intended). So what is an investor to do? Flee to cash? Remember that little discussion we just had on market timing?

Downside protection? Maybe you have heard of that term. Portfolio insurance is usually highly cost prohibitive. However, there are forms of downside protection that can help to mitigate some losses during drawdowns. The objective is to determine which strategy and how much downside protection to utilize while not letting the costs become a large drag on upside performance.

A few statistics to “bear” in mind

On average a bear market occurs about every 3 ½ years. There can also be significant drawdowns every calendar year. Can you remember all the way back to 2016? Yeah, last year. By the third week of January 2016 the S&P 500 Index was down over 11% for the year. (When the market moves down 10% or more from a recent high that is often referred to as a correction.) Do you remember what the S&P 500 Index total return was for 2016? It was up +12.25%. Yeah, a roughly 21% intra-year movement from it’s low to its high.

One average a correction occurs about every 12 months. That’s right, the market has a drawdown of at least 10%, on average, about every year. So it is important to understand corrections and bear markets in context.

According to a study by Ben Carlson, of Ritholz Wealth Management, between 1950 and 2016 the average drawdown of the S&P 500 Index was -13.5%. Guess what, during that same time period the market was up an average of +11%. Furthermore, the returns were positive in 79% of the calendar years and 50% of the time the returns were +15% or more.

Keep your arms, legs, and portfolios inside the ride at all times

Investing sounds like a wild roller coaster ride with inherent risk. These ups and downs can be difficult to stomach. In market jargon, we refer to this up and down movement as volatility. Bear markets, corrections, and drawdowns are an unavoidable part of investing. Helping a client get from point A to B or accomplishing their goals involves helping them to understand that there is no perfect portfolio nor no perfect investment strategy. Understanding risk requires us to take a measured approach and building investment portfolios and implementing strategies that seek to maximize the likelihood of accomplishing those goals.

It’s important for us, as advisors, to know and understand if you the client can live with the portfolio that is well suited for you. We ask you questions and use tools to understand how you feel about risk. Risk assessment tools are most useful when used in conjunction with a skilled advisor. Risk tolerance, loss aversion, and other fancy jargon are really just ways for you and your advisor to make sure you are invested, to the degree possible, in a portfolio that you can live with. Most of us are not wired to remain calm in the midst of chaos and volatility. Education is key. As client investors understand that it is a bumpy road, you will be better prepared to stay the course when the inevitable stormy waters approach.  

So here a few keys to being bear market – savvy:

  1. Know your long-term goals and objectives and make sure your advisor knows them as well
  2. Try to understand and communicate how you feel about market risk and your investment portfolio
  3. Make sure your advisor discusses with you how your current portfolio relates to your feelings about risk and ability to achieve your goals
  4. Periodically review your financial plan. Circumstances change and sometimes there needs to be a realignment of goals and objectives with adjustments to your investment strategy
  5. Stay calm. It is the disciplined and educated investor that is able to weather corrections, drawdowns, and even bear-markets. Staying invested is one of the best ways to reach your long-term goals.

As your advisor, it is our job to help you navigate the investment landscape. We are your partner in helping you formulate a plan and implementing strategies to help you achieve your goals. We appreciate the trust you put in us and strive continually to do our best to help you be successful.

1 “Staying Safe Around Bears.” National Parks Service, U.S. Department of the Interior, www.nps.gov/subjects/bears/safety.htm. Accessed 20 Sept. 2017.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and investors may incur a profit or a loss. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance is not a guarantee of future results. Opinions expressed in the article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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