Navigate the pain of your first bear market

Earlier this week I posted a chart showing how volatile the stock market has been this year:

Things have gotten even more unstable since then.

This post elicited the following response from someone on Twitter who experienced their first bear market:

Yes, there is a precedent for this.

These are all bear markets since WWII:

If anything, it is surprising that the current iteration is not inactive moreover.

Inflation is raging at a 40-year high. Interest rates are rising at the fastest pace in history. Federal Reserve officials are actively cheering on the collapse of the stock and real estate markets. The Fed is trying to orchestrate a recession.

Yet the S&P 500 is only down about 21% from its all-time high. It is not even an average bear market.

Maybe we still have to fall. Maybe not. But in any case, if you are going to invest in stocks you have to get used to this.

Here’s what I wrote in my most recent book on how I think about pushups:

Over the next 40-50 years I plan to experience at least 10 or more bear markets, including 5 or 6 that constitute a stock market crash. There will also likely be at least 7-8 recessions in that period, possibly more.

Can I be sure of these numbers? You can never be sure of anything when it comes to markets or the economy, but let’s use history as a rough guide on that. Over the 50 years from 1970 to 2019, there have been 7 recessions, 10 bear markets and 4 legitimate market crashes with losses of more than 30% for the US stock market. In the last 50 years, from 1920 to 1969, there have been 11 recessions, 15 bear markets and 8 legitimate market crashes with losses of more than 30% for the US stock market.

Each of those bear markets and recessions was unique in its own way. This is unlike anything we’ve ever seen before when you add in the pandemic, rampant government spending, negative interest rates, supply chain shocks, and so on.

Markets change and evolve constantly over time. In some ways, it is different with every bear market.

In other respects, it is always the same, especially when it comes to human nature which is the only constant in history.

Any bear market causes feelings of panic and hopelessness. They make you question your previously held investment beliefs. They force you to consider whether or not you have the gut strength to stick to your long-term investment plan.

I’m not going to sweeten it for you – bear markets are painful. Any of them (even if you’ve experienced a handful of them in the past).

But if you are a young investor, the situation today is much better than it was 9-18 months ago.

The S&P 500 is now down by just over 20%. The Russell 2000 is down by nearly 30%. The Nasdaq 100 is down more than 30%.

The shares are for sale. They could be penalized further, but I don’t think many young people will regret buying stocks right now when they look back in 15-20 years.

Can you believe where you could have bought stock in 2022? some are bound to say in the 1930s, when millennials are in their peak earning years and are devouring stocks.

Not only are stock prices lower, but you can finally earn some return on your cash.

For years I have been bombarded with questions from young people about where to put their money aside while saving for a down payment or a wedding or an emergency fund when there was no income to be made.

Guess what?

We finally have some yield!

Short-term Treasuries now produce 4%. This means higher rates on savings accounts, CDs, money markets, and short-term bond funds.

Financial asset prices are falling, but expected returns are rising.

As long as you regularly make contributions to your retirement, brokerage or savings account, the situation has improved this year.

It doesn’t seem like it, because right now everyone is very angry about the combination of high inflation and rapidly rising interest rates.

It’s hard to ignore all this negativity, so the best option for young people is to automate the investment process as much as possible.

Automate your savings so you don’t have to think about it. Automate your pension contributions so you don’t allow bad days or months to affect your multi-decade time horizon. Automate your investment purchases on a periodic basis so you are not tempted to time the market.

The more good decisions you can make early, the easier it is to avoid the painful emotions caused by the inevitable bear markets.

Things could get worse before they get better.

If you are a net saver for years to come, this is a good thing.

We talked about this question in the latest edition of Portfolio Rescue:

Taylor Hollis joined me this week to discuss matters related to estate planning for a growing family, saving for retirement, buying or leasing a new car, earning through options, and more.

Here’s the podcast version of this week’s episode:

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