Keep Calm, It's Just a Normal Bear Market

Includes: DIA, QQQ, SPY
by: Roger Nusbaum

Every once in a while when things are starting to turn a tad uglier I like to post a reminder about how normal market declines are. Corrections and bear markets come along every so often, the market endures it and then works higher. Regardless of what is happening now (my take has been that we are early in a bear market) at some point the market stops going down and will start going higher. Over the long term the stock market averages close to 10% per year which includes bear market declines.

Declines followed by recoveries and new highs is just how it works. It may take longer than you would like, but it does happen. Embracing this simple truism should reduce the emotional toll that declines take.

Personally I have unyielding faith that cycles are normal: they tend to end in a similar manner, and start in a similar manner, and doing a few simple things within a portfolio can help buffer the impact. Obviously there is no guarantee, and there are people who should not attempt to take defensive action.

I have been writing about some of these basics for months as I have implemented them. One thing that is true - and I have tried to make this point countless times - is that if it is turning out to be a bear market, it is happening slowly. For now the market topped out two months ago, with the decline thus far still in the realm of down a little. It is not too late to take defensive action if that is appropriate.

Over the last few months or so I have reduced volatility by selling and reducing a couple names, adding a little double short here and there, and tilting toward sectors that tend to do better in a recession or bear market, like staples.

I also write often about moderation which applies to being defensive too. I think 100% cash is a very aggressive position. Just as bear markets tend to start the same, they also tend to end the same. Whether this is just a dip, or really is a bear market, there will be a fast and furious rally, and if you are 100% cash (or some other extreme number) you are in a situation where you have to correctly guess when that comes, which is not a bet I want to make.

Lagging a monster rally while erring on the side of caution is not a problem like missing a monster rally is.