Don’t Let the Bear Take Your Breath Away

by | Oct 8, 2008 | Cash Flow, Weekly Column

mamma-bear.jpgThe bear market we’ve anticipated for the last several years is here, and she’s recently grown from a baby bear into a mama bear.

We are said to be in a bear market when the Dow or the S&P 500 declines by 20%. Until a few days ago, even with all the market gyrations of September, we were down about 23% from the top. The precipitous drops of the last few days have left the S&P down 36% from the market high on October 9, 2007.Ironically, since the Great Depression, the S&P’s average drop in a bear market is 36%. During the last bear market from 2000 to 2002, it dropped 50%.

Fortunately, if you are diversified among asset classes, your portfolio is probably down about half that. How far could it go? Who knows?

So is the worst behind us? Historically, yes. Unless we are entering another great depression, one could be cautiously optimistic that the worst is behind us now. Could the markets drop more? Certainly and probably. Should you sell out your equities and move to cash? Absolutely not.

If history is any example, most people will give up and get out at precisely the wrong time. An old adage for building wealth is “buy when the blood is running in the streets.” With the panic I’m seeing among investment hold-buy-sell-block.jpgadvisors and the finance world, I am guessing we are getting closer to that point.

I’ve constantly reminded clients that our returns of the past five years have been extraordinary and that a reversion to the mean would be in our future. Every four or five years, it isn’t unusual that everything in your portfolio underperforms and there is nowhere to hide. That day is here. I’ve educated clients that, 95% of the time, a return of minus 18% to a positive 35% is normal to produce a long-term return of 7.5%. We tested the highs of that range in 2003 with returns in the mid 20’s. This year, we will certainly test the lows.

The American Psychological Association released new data last week stating that money is the top stressor right now for 80 percent of those surveyed. More than half reported irritability, anger, fatigue, and sleeplessness. No surprise there!

One cause of such difficult emotions around finances is our money scripts, or unconscious beliefs about money. These are partial truths, typically formed in childhood, that shape our choices. In times of financial stress, blindly acting according to money scripts can result in irrational and destructive behavior—such as selling during a bear market.

An October 2 Gallup poll shed some light on an interesting money script. Most respondents said their own finances had been harmed by recent events, and close to 70% expected their finances to be harmed in the long term.

In fact, the probability is over 70% that short-term fluctuations in a diversified portfolio are normal and over the long term their finances will recover and be just fine. Yet for those holding to a money script that they will never recover from the current market declines, it’s no wonder that they are feeling fear, hopelessness, and anger.

We are beginning to hear the normal cries of any market bottom or top, which are, “It’s different this time.” No, chances are it isn’t different.

just-breathe.jpgSo what is a battered and bruised investor to do? Hold onto your positions, rebalance (a mechanical way to sell high and buy low), and be aware of your spending. Don’t let your money scripts drive you to panic and sell out your portfolio. And above all, look Mama Bear in the eye and just breathe.

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