Is this one different? Yeah, I really think so. Here’s how to move forward.
The stock market was up this week. It was also down this week. If you’re getting a little tired of the gyrations that seemingly lead to nowhere, welcome to a bear market. Nothing says “bear” like a market where the headline stock indexes get tossed around during the day, between days, and over months and quarters.
This is different from the textbook definition of a bear market (a 20% decline from a peak). Investing is certainly a numbers-oriented process. But when it comes to putting labels on things, you are better off leaving that one for others. Because the only label you ever want on your portfolio is to be successful, according to whatever definition you use for that.
From my vantage point, some in the financial advice industry and media do not understand that. They never have. Instead of managing risk, they use a tired, old approach. Hope. That’s why, during this most unusual of the 5 bear markets I have navigated through (starting with the 1987 Crash), the priority for investors should be to spend less time on labels, and more time on engineering the type of outcome they want.
After all, we don’t know what the market will do from here. Will the S&P 500 continue to be driven by tech stocks? Will value, small caps and international stocks catch up to large U.S. growth stocks? Will interest rates go to zero and below?
I have no idea! And you should not try to. When it’s an unfettered bull market, you can nitpick like that for some extra return potential. But nowadays, in an environment that is clearly not going to be “normal” any time soon, the best step forward is to manage risk of major loss first. Then try to make as much as you can.
How do you do that? Its starts by recognizing something. That is, what we have here is a market that cannot possibly develop a coherent view of the future. So, instead of fighting that, you adapt to it.
This means you are more willing to take gains in “small bites” through renting portfolio positions, not owning them. And, you need to be able to think on both sides of the ledger, so to speak. There will be stretches of time when what you buy will drive your returns. And, there will be periods where your portfolio’s results will be more a reflection of how you manage risk, and even exploit volatility. The past month, as well as the past 4 months, and past 2 years have all been excellent examples of that.
Just throwing hard-earned assets into the stock market is NOT the end goal for you. The market is an inanimate object. You need to use that inanimate object to extract the return stream you need to life the way you want to live. To me, it has always been that simple.
What we have seen in our lives this year brings us back to 5 key features of any successful, sustainable investment approach: being adaptive, flexible, disciplined, rational, and humble. Try to be all of those things, not only now, but on the path to the next bull market, whenever that is.
In the meantime, the decision-process speeds up for a while, thanks to record market volatility. I think we have learned some things along the way.