THE BLOG

What Should You Do in a Bear Market?

You've probably heard the advice to ride through market turbulence. That is good advice, but it needs to be repeated regularly because too many folks don't heed it - even people who should know better.
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As every investor knows, the markets have been especially volatile lately. Ok, now what?

You've probably heard the advice to ride through market turbulence. That is good advice, but it needs to be repeated regularly because too many folks don't heed it - even people who should know better.

Last week a reporter for a business news magazine sent out a query to those of us who toil in the investment advice business. The topic was "How to adjust your portfolio in a bear market." The journalist wanted us to "list three or more ways to accomplish the proper tweaks and adjustments in a portfolio when markets turn bearish."

It's a question many of us get asked, but I opened my reply with this:

Bear market portfolio adjustment? Wrong! You adjust your head, not your portfolio.

Seriously.

Ok, I'm being slightly flip, but not much. My response assumes that before the bear ambled into your back yard you had already put together a portfolio that matches your financial situation and tolerance for risk. If that is indeed the case, the inevitable ups and downs of stock prices should have been part of the equation.

If there is any adjustment to be made, it would be to look at any cash positions you have and use that "dry powder" (as we say in the industry) to buy more of what you already own. You buy more because you have done your homework and you already own lots of good stuff (like carefully chosen no-load mutual funds, for instance). So when prices of those good things go into the discount bin, you scoop up the bargains.

One exception might be for tax savings: if you want to lock in some losses (to offset gains elsewhere in your portfolio), a stock market drop is the time to do it.

That said, every bear market is different. The causes, the players, the reactions, the global environment, are different every time the markets fall. Experts always disagree about why the market fell, and perhaps more importantly, how long the slump will last. And this might be a good time to note that last year just about every "expert" predicted that the Fed would raise interest rates in 2014 (it didn't) and as a result bond prices would fall (they didn't).

From my perspective, we have reasons to be sanguine about the market; U.S. consumer spending remains strong, interest rates are historically low (and we expect them to stay low for the foreseeable future), oil prices are not likely to rebound sharply, and the American economy is still the shining beacon for the rest of the world.

So watch the market gyrations with interest but don't make any rash decisions.