Mitigating Losses in a Bear Market

My favorite joke so far this year (as of June 4, 2022) has been, “When you buy the dip but the dip keeps dipping”. It has helped me feel better as I see all the returns from last year vanish, and probably sourced from my inexperience as I’ve grown up in one of the greatest stock market decades when “Stonks only go up”.

Lately the conversation in my group chat has shifted to mitigating losses during a bear market. We know interest rates are rising, global fiscal policy is okay taking on some economic hit as we take a stance against Russia, and Covid continues to pressure supply chains and goods production. So is it better to stay in cash until it’s all over? F*** No! The best way to mitigate losses is to stay invested during this time and let the market mitigate your losses.

The S&P 500 index is down about 14% year to date. It sucks but somewhat expected as there’s a market crash every 4-5 years. What you may not realize is that there have been 6 more positive days of returns this year than negative days (56 positive days versus 50 negative days) and this is in line with long term averages. By doing nothing, you’re letting the market claw itself back for you.

In and around a bear market, the daily market returns ends up being more volatile as well. Said another way, while we see some bad daily returns, we also see some of the best daily returns. About half of the S&P 500s top returns happen in a bear market and another 34% happen in the two months right after. These top days are few and far between, concentrated at the top, and you have about 50/50 chances on trying to time it. Those who miss out end up digging a deeper and deeper hole.

But stop right there, don’t try to time the market for those best days because the cost of getting it wrong is not worth the extra points from getting it right. If you take just the top 25% of daily returns this year, the S&P 500 is up 41%. These days have helped investors to mitigate their losses from the bad days. If you missed out on just 5 of the top days so far this year, the year to date return for the S&P500 would have been down another 11%, almost doubling the losses so far.

So what should you do right now? A bear and bull market shouldn’t change the strategy of a successful retail investor, continue the strategy as is: stay diversified, rebalance, tax loss harvest, monitor your cash buffer, and put as much money to work as often as you can.

We’re finally seeing some prolonged periods of negative returns in the stock market, and my public market tech investors probably know this all too well as their down trend started around late February of 2021. It’s a good lesson on staying (key word) diversified because of how quickly market environments can shift.

Compliance stuffs
Just remember, I’m not your financial advisor so the information may or may not best apply to your situation and you should get formal advice prior to doing anything. The information/data that is shared should be double checked by you and any conclusion that is driven based on past data is not to be interpreted as my advice for your future. I will do my best to only write what I think is true and right, but mistakes happen and we’re all learning together – this is meant to be an informal conversation.

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