A Lesson on How to Deal with Bears – On the Hiking Trail or in the Capital Markets
If you’ve been lucky enough to call beautiful British Columbia home for much of your life, then you’ve most likely seen a black bear or two in your day, be it on the hiking trail, or pillaging your dumpster. The site of these big balls of fur can be enough to make your pulse spike, especially if there isn’t a pane of glass separating you and them. We don’t blame you; they can weigh in excess of 600lbs!
Now every BC resident should know the protocol for meeting a black bear on the trail and funnily enough, the principles are equally applicable to how an investor should react to a “bear” stock market. To set the scene, a bear market refers to a stock market event in which prices decline at least 20% or more, as we are experiencing now with the impacts of COVID-19 and a black bear refers to teeth, fur… you get the picture. Let’s say on your weekly dog walk you have the unfortunate pleasure of walking around a corner and see a bear at 20 yards. Wildlife experts and financial planners recommend the following actions:
1. Don’t panic and more importantly don’t run!
In the case of a real bear, your fight or flight urge will be screaming at you to high tail it out of there, but it can cause the bear to give chase and guess what? They’re much faster than you! The capital markets equivalent in coming face to face with a bear market is panicking when the stock market appears to be in free fall. This sense of fear can lead to an investors equivalent to running: selling and going to cash. Going to cash crystalizes the loss, may cause you to miss out on the rebound, and leaves you with the tough decision of when to get back in.
2. Act big and make your presence known in calm way.
It’s important at this point to make the bear realize you are there and that you do not mean it any harm. Act tall and speak in a calm voice to the bear; remember, they are naturally wanting to avoid us. We liken this to letting the market know you’re a disciplined investor and that while you don’t like its volatility, you’re not going to sell your holdings. You have a plan and you intend to stick to it. This investment strategy was designed to help you meet your goals before you encountered this “bear” market and will continue to be the right strategy long after the bear has sauntered into the bushes.
3. Stand your ground.
More likely than not, this bear doesn’t want to be a part of this encounter any more than you do. By acting calm and giving the bear the space to leave, it will almost certainly take the opportunity to do so. Turning to historical events, bear markets have shown themselves to behave the same way. Periods of fear, uncertainty, and negative returns give way as consumer optimism, fiscal stimulus and hope lead to positive economic conditions. It’s critical that you stand your ground, even when it is a truly uncomfortable experience as an investor.
It’s important to remember that black bears are as much a part of the BC ecosystem as bear market events are a part of a functioning stock market. Hikers and investors alike who have followed the proper black bear safety protocols have been able to chalk up these “encounters” as learning opportunities and have reaped the rewards of empty hiking trails and positive investment returns!
A History of Market Ups and Downs (Click picture to expand)
S&P 500 Index total returns in USD, January 1926-December 2017
Using a 20% threshold for downturns