How to stay calm in a bear market

How to stay calm in a bear market

I live and die by a single investment strategy.

It’s simple AF and goes as follows.

Whenever you go to bed wondering: “I have NO idea what the world is going to look like tomorrow?”

That’s the ultimate buy signal.

But this strategy’s much harder than it seems.

Meet my “Bear Market Journal”

I specifically recall two of those moments.

The first was Sunday, September 14, 2008. If you worked in finance, you were on calls all weekend wondering if Lehman Brothers was going to file for bankruptcy.

And no one had any idea how that would ripple through the financial system and the broader economy.

Now I have the unsexiest investing strategy ever. I’ve been dollar-cost-averaging the S&P 500 since 1994, when I was 16 years old.

NGL, it’s single-handedly made us rich.

It’s been a remarkable strategy that has enabled a life of quasi-financial freedom.

Yet in a crisis, it’s always been tempting to reset the strategy. To sell at the lows. Or to believe that this time it’s different.

So I created a journal to combat this bias. I call this my Bear Market Journal. It’s a reminder, to myself, to stay the course for my (highly effective) investment strategy when it’s possible to doubt myself. It also acts as protection against these 4 behavioral biases (that always lead you astray):

  1. Loss Aversion: The tendency to prefer avoiding losses to acquiring equivalent gains. During sell-offs, your loss potential will be staring you in the face!
  2. Herding Behavior: The tendency to follow and copy what other investors are doing. During sell-offs, well you know what others are doing!
  3. Recency Bias: Weighing recent events more heavily than earlier events. During sell-offs, the “recent performance” stinks!
  4. Overreaction and Availability Bias: Similar to Recency, you’ll react too strongly to the currently available information.

The four most dangerous words in investing

So now, I’m going show you the actual entries in this journal. Every time things get scary, I collect articles, emails and “prophetic statements from pundits.” And whenever things get scary, I can just remind myself that this too shall pass.

(I’ll also share the time stamp and how the market has performed since the entry.)

For the first entry, you remember the refrain This Time It’s Different. This was frequently referenced after the Global Financial Crisis.

After all, the leverage. The mortgages. The credit derivatives. In fact, there was an entire book addressing this called, This Time It’s Different.

Release Date: October 1, 2009
S&P 500 Performance since: +539%

(Furthermore, it turned out the book employed poor statistical methods to prove its points.)

“Maybe you should abandon your strategy”

Then in 2019, a very savvy investor friend of mine felt like it was time to opine on my investment strategy. I honestly don’t even remember what was happening in the markets then, but his words carried gravitas. And he posed a question:

Are there other ways to get growth in the next decade versus how got it in the prior decade?

Date: January 3rd, 2019
S&P 500 Performance since: +118%

Good thing I didn’t listen to this friend – my investments have doubled since!

This time it’s really different

The next 3 entries all come back to the four most dangerous words in investing.

This time it’s different.

And this time, it felt different. We were entering a global pandemic.

It was March 16th, 2020. It was pouring rain in LA. Rudy Gobert had just mockingly touched all the microphones at an NBA press conference.

It was one of those moments when I remember saying to myself:

I have no idea what the world is going to look like tomorrow.

And I don’t want to downplay that it was a very scary and uncertain time. It would’ve been very tempting to abandon the investing strategy.

Yet here’s where keeping receipts helps keep you honest.

The authors of This Time It’s Different came back to say: This time really is different.

Date: May 18, 2020
S&P 500 Performance since: +109%

Around the same time, Axios proclaimed “an unprecedented depression.”

And this time, another friend warned me to sell all my equities.

It’s going to get ugly.

Why I keep receipts

I share this with you, not for an I-told-you-so moment.

I share it because I, too, am human. I’m subject to the negativity bias and the numerous behavioral biases that stack the deck against you when it comes to investing.

But now I know that whenever I’m scared – I just have to pull open my Bear Market Journal to remind me to stay the course.

And if I’m feeling extra spicy – to buy more.

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