Rule No. 1: Upon Confrontation, Stand Your Ground
Confronting a Market Bear: Bearish news and price action are normal in the market, and rarely does one bearish piece of data lead to a bear market. Investors who adjust their strategy every time they see or hear a bear could potentially inflict significant and unnecessary damage to their portfolios.
Rule No. 2: If the Bear Attacks, Lie Still and Quiet … Don’t Panic!
Market Bear: A bear market attack is generally ferocious and quick. Repositioning a portfolio in the midst of an attack has often proven to be a regrettable strategy. Running away by immediately shifting to less risky asset classes (bonds or cash) or less risky sectors (consumer staples or drugs), one runs the risk of locking in losses and not being around to participate in any bounce that could occur after the attack. On the other hand, those who choose to fight the bear by adding to their position in the midst of an attack could potentially exacerbate the damage if the attack lasts longer than expected.
Rule No. 3: Determine the Cause
Market Bear: Assessing whether an attack was instigated or random is a significant factor in investing. A bear attack that is a result of a significant fundamental change in the investment climate (i.e. change in Fed monetary policy, significant deterioration in economic data, bankruptcy of a major company, etc.) should be taken more seriously, in our view, than an attack that was seemingly random.
Rule No. 4: Learn from the Experience and Proceed more Prudently
Market Bear: A prudent investor would never bury their dollars in the backyard or under a mattress to avoid another bear attack. They recognize that over the history of the U.S. stock market, there have been more up days than down days, and they have likely been more than adequately compensated for the temporary wounds suffered from an occasional bear attack.
However, it is important to recognize that certain investor behaviors, such as failing to diversify, not trimming positions when they become overly extended or positioning a portfolio too aggressively could potentially amplify the impact of a bear attack when it comes.
Rule No. 5: Retrieve the Valuables After the Coast is Clear
Market Bear: Investors have historically over-reacted to attacks by the market bear. In their panicked effort to lessen the impact of an attack, they often throw good stocks out along with the bad. In our opinion, this leads to temporary but potentially attractive opportunities to invest in good stocks for those investors who stuck around in the aftermath.
