Bear Market: when we start to doubt
The market environment is negative. There is pessimism and distrust. A kind of denial of reality. Can we see here a positive sign for the future?
In times of crisis we feel that we were investing for nothing. We postpone consumption, we refrain from moving house, buying a car, going on special holidays or having dinners with friends, only to have our wallets fall and even with a lower amount than initially invested.
Is it worth putting up with? Did I make a mistake? Is it worth not living the present thinking about an uncertain future?
These lamentations are also associated with the selection of invested assets. It is common, for example, to conclude that we should have invested in Asset A instead of Asset B. A self-punishment, confirmed by the results and that we should have anticipated because, supposedly, we were in control and carefully following the evolution of the news and charts or we trusted someone to watch out for us.
Deep down we begin to doubt. Patience disappears. We are eagerly looking for alternatives that, as our friends and market gurus have told us, have worked very well in the past. We try to do something. They, who don't know our specific situation, recommend selling one asset and buying another or the wise resignation “Ah, but now you're at a loss, so there's nothing you can do, you have to hold on”. And you confirm: "I don't want to sell without recovering my investment."
These conversations are more common than we think. And it is in these moments that the main errors, deviations, prejudices and behavioral biases are revealed, namely cognitive and emotional errors, such as hindsight, the illusion of control, or the aversion to regret.
It's uncomfortable to admit that we're wrong (it's an ego defense mechanism). Memory is not perfect. We fill in memory lapses with what we prefer to believe, and we may see past events as predictable when in reality they were not.
On the other hand, we have a tendency to believe that we can have control or influence results when, in fact, we cannot. Take a look at the lottery numbers situation. When possible, people are willing to pay a higher price per ticket to select their own numbers than people who play randomly assigned numbers. Because? Because they believe they “have control”.
There is also the tendency towards investments that we are familiar with or "follow the herd". Making decisions is difficult and we are afraid of regret.
Take a deep breath. Don't decide with your heart and luck. One of the main attributes of Warren Buffet, the ultimate example of the Intelligent Investor, is the ability to make decisions without fear of regret and based on his analysis, his process and his long-term goals, looking to the future.
What is a Bear Market?
The markets are full of memorable quotes and phrases and there is one that is a must-see in a bear market: “the only thing that goes up in a crisis is correlation”.
As we saw in this article about the 60/40 portfolio, this is exactly what is happening. Traditional asset classes have not brought the offsetting effect through diversification and at one point there does not appear to be any safe haven asset.
“So, should we doubt and throw the towel?"
A bear market, according to investopedia, is when “a market suffers prolonged declines in prices. It typically describes a condition in which asset prices fall 20% or more from recent highs, amid widespread pessimism and negative investor sentiment.”
Some time ago, a tennis coach said that a player has 3 opponents: the net, the baseline and the opponent himself. Basically, he wanted to say that we are our main opponent. And the fewer mistakes we make, the more likely we are to win.
Analysts and commentators feature prominently in these times of crisis. We see many lines written and many experts explaining what happens in each bear market. They calculate average falls, how deep, or what is the average return after a fall of more than 20%. The average recovery time, the most and least penalized sectors,
And I ask for what? Mere academic exercise? Do we need this information to make decisions? No, but we feel comfortable knowing what happened, right?
But the truth is that in each crisis the starting point is different, the context changes, the macro and geopolitical scenarios evolve and the assessments are not the same. Not to mention our personal situation, which is also different and unique.
These “what happened in the 10 bear markets” analysis means nothing for the current bear market and decision making. Remember that before the great financial crisis of 2008-2009 there had not been the great financial crisis. Before real estate depreciated sharply, real estate had never depreciated in this way. Before a big company went bankrupt it was impossible for a big company to go bankrupt. Surprises are always happening because we don't know the future.
Instead of these analyses, focus on your individual situation, your investment plan and define expectations or possible paths for the future. Invest with a margin of safety. Don't make the same basic investment mistakes that others often make.
Recently, António Horta Osório, in an interview, said that the times ahead will require more savings on the part of people, advising families to tighten their belts and companies to exercise prudence. He couldn't agree more with these recommendations. It is at this time of uncertainty and difficulties that we must be more aware of our responsibility and attentive to the future. Increasing savings means consuming less now, but it also means consuming more in the future. It also means investing at a possibly better price now and below the expected value in the future. It also means compensating for the deviation that the investment portfolio opened during the bear market. Yes it's true. We don't control the market, but we manage to control our behavior.
Therefore, if the portfolio is in line with our objectives, risk tolerance, preferences and restrictions, it is the savings capacity, optimism and time that will take us back to the projected value of the portfolio. Do not hesitate and follow the defined plan.
Vítor is a CFA® charterholder, entrepreneur, music lover and with a dream of building a true investment and financial planning ecosystem at the service of families and organizations.