Investing without Wall Street: The Five Essentials of Financial Freedom

CHAPTER 9

How to Survive Bear Markets

Since the long bull market of the 1980s and 1990s ended in early 2000, there have been three major downturns. The worst was the Great Recession, which began in October 2007 and finally ended in March 2009. It is not likely to be repeated soon. But no doubt there will be other bear markets. The lessons I offer in this chapter cover both severe and normal bear markets.

Here's a thought. Why not just avoid equities altogether? That would solve the problem. The answer is that a few very rich people indeed can and perhaps should stay away from stocks and the periodic heartache that they cause. But all the rest of us have to take equity risks because we can't save enough to have a comfortable retirement without the growth that stocks can provide. If you need equity size profits, you are going to have to take equity size risks.

Therefore, it is a virtual certainty that somewhere down the road your investments are going to be under water. To avoid any losses at all is impractical; the goal should be to avoid the catastrophic loss that would change your lifestyle.

Too Little, Too Late

As befitting their mandates, throughout 2008 many financial publications offered advice to their readers on how to limit losses. They offered sound practical and psychological advice, but unfortunately much of the advice was of little help because it was offered far too late. And don't expect the advice to come earlier the next time around. Heed the oft-repeated advice, ...