“Bear markets are hard enough to get through without getting in your own way,” Peter Mallouk of Creative Planning tweeted in a thread that included several other great tips for investors.1 Peter has found four ways that investors “[get] in their own way”, with which I mostly agree. In my 36 years of business, I have been through several bear markets, and so, considering myself well-versed in the topic, I added two more items which I feel are crucial to the current economy.
- Triggering the wash-sale rule.
Mallouk writes: “This rule can prevent [investors] from taking a tax deduction for selling a security at a loss if they repurchase shares, or a substantially identical vehicle, within 30 days.
“When tax-loss harvesting is done improperly, it can trigger the wash-sale rule, disallowing your capital gains tax deduction and resulting in a higher tax bill than expected. This results in a completely wasted opportunity to reduce your tax bill.”2
There are tax advantages to be gained in bear markets. Stocks trading at a loss from the purchase price can be sold and purchased with a 30+1-day difference. That results in a tax loss and still owning the stocks for potential gain as the bear market comes to an end. It is a strategy AFC has used for decades to enhance the return to our clients.
- Getting spooked by volatility.
“The key to success during a bear market is to have an investment strategy in place to help manage volatility and put you in a better financial position once the bear market ends,” he tweeted. “This is not the time to abandon the plan.”3
The bear market of 2021 has had far greater volatility, in my opinion, than that of the recent past. At AFC, we have seen account values down more in 2021 than they were in 2008, and yet those times were much worse economically. Today, however, with computer algorithms conducting over 65% of trades, there is little regard for the fundamental value of each company. In the longer run it is the value of the company, not the stock trading pattern, which determines the value of the stock.
The objective is to survive the bear market and be in a good financial position when it ends and understanding it will end.
- Getting wrapped up in the news.
“Don’t let disturbing news headlines cause you to lose sleep,” Mallouk advised. “News headlines and talking points are often exaggerated to drive ratings. They are interested in eyeballs and listeners, not your financial wellbeing.
“Whether it is the TV financial program, the newspaper, the online reporting or the cable news, their objective is to gain advertisers and they do that by increasing their ratings. They are not rewarded for being right, just finding more viewers.4 (Emphasis added.)
There may be no better illustration than the news reports following the crash of October 19, 1987. I counted the number of times the news projected the market would continue to fall or take many years to recover versus the times they reported the market would recover and go on to new highs. When the count reached 65 for disaster versus one solitary story that the market would recover I quit counting.
What did happen is ratings for those news programs increased and I would assume they sold more advertising.
- Following forecasters.
“No one knows what the stock market will do,” he wrote. “Anyone that shows confidence around the direction of the stock market is someone that should be ignored.
“Focus on your investment plan, never have a portfolio that is completely at the mercy of the market, and don’t try to time the market based on pundits and the media. Stick with the game plan and you, and your portfolio, will survive and thrive!”5
There was a wholesaler who came into the office to discuss the impact of the crash of October 19, 1987. He stated: “A trillion dollars has been wiped out of investor holdings. You will be able to go into Nordstroms this weekend and hear a pin drop.” I told my wife we needed to go to Nordstroms but when we arrived we had a difficult time getting in because there were so many people there shopping. I said to my wife, “Maybe no one told them they have lost a trillion dollars”.
No one knows how long bear markets will last. All we can say is that in the past bear markets have always ended. Investors need to be prepared for when that will happen.
Think about this: Trying to diversify away from the market has historically produced worse longer-term returns. During good times, the average FA returned less than six percent (6%). That is less than the traditional comparison of the portfolio that is invested 60% in stocks and 40% in bonds.
I agree that those who stick with the game plan will survive and thrive.
To Mallouk’s four points, I add these from my own experiences:
- The objective is not just to survive the bear market, but also inflation.
The dollar lost 70% of its purchasing power during the 1960s and 1970s. We are probably seeing the beginning of an extended period of inflation. During the 1960s and 1970s, there were stocks that did very well while the rest of the market floundered. During inflationary times, companies need to cut costs and gain productivity. But that is seldom enough. Those companies that do the best are those who can raise prices or significantly increase sales. They are few and far between. Finding the right stocks is what AFC is all about.
We are in a very different time from any in history. We are experiencing inflation at the same time as a bear market. The 1970s were a time of “stagflation”. Unemployment increased from 6% to over 10.8% by 1982. The economy was stagnant.
Current unemployment is less than four percent (4%). Companies are creating jobs by moving supply chains back to the United States and transitioning to alternative energy. The number of new companies started between 2020 and 2021 soared. 64% of job growth in the United States is created by small companies.6 There is an argument to be made that an even greater percentage will come from small companies in the future. Most current employment growth comes from the expansion of small companies.
- Long-term is measured in years, not weeks.
It is not only our goal to help our clients’ portfolios survive the bear market, but we also strive to grow portfolios at the rate of inflation or greater. Combining these two goals brings us back to point two: don’t get spooked by volatility. There will be volatile times; there will be scary times. Don’t get spooked out of the market by them.
Look at the longer-term. Longer-term is measured in years, not weeks or months. Seeing the portfolio down from day-to-day or from one week to the next is getting caught up in the volatility. Focus on the longer-term.
President & Principal
1. Mallouk, Peter, Twitter Post, October 2022 12:21pm, https://twitter.com/PeterMallouk.
2. Mallouk, 2022.
3. Mallouk, 2022.
4. Mallouk, 2022.
5. Mallouk, 2022.
6. Alfonso Serrano, “How Many Jobs Do Small Businesses Really Create?,” Fundera (Nerdwallet, July 24, 2020), https://www.fundera.com/blog/small-businesses-job-creation#:~:text=According%20to%20the%20Small%20Business,created%20in%20the%20United%20States.