The principles of money

“I can be changed by what happens to me. But I refuse to be reduced by it.” 

Maya Angelou, 2009

Hold Tight To The Truth

The truth is bear markets¹ are a natural part of a market cycle.  Markets can go up, down and sideways.  Although it feels scary, know that it is a natural rhythm.  The average bear market last about 9 months.  Long term investments are the best way for the average investor to survive a bear market.  If you have short term investments such as monthly options² or ARM mortgages³ your investment may not recover if the economy moves against you. Lick your wounds, learn from your mistakes, and move on. 

Create a Bear Market SOP 

I learned of a SOP (Standard Operating Procedure) from a previous role at an engineering firm. A SOP is a step-by-step guide on how to complete a task.  When markets start to take a dive, the media, your coworkers and so-called experts will began to spread fear.  You need to know how you will navigate your anxious thoughts and stick to your thesis.  Here is my SOP when it comes to negative news and market worries. It’s called the Willful Ignorance SOP.

• Turn off notifications on all finance blogs, websites and professionals on social media.
• Uninstall brokerage apps
• Limit news coverage to one cycle.  
• Buy a new video game
• If I am not in financial hardship, buy at a discount

This out of sight out of mind strategy came in handy in 2021. My post Covid gains were dwindling, and I was glued to my app watching my portfolio value decrease day after day. By the summer, I was mentally exhausted. I uninstalled all the finance apps and stopped checking my account daily.  I replaced that time doom scrolling all the negative news with a neutral activity. I play video games on my Nintendo Switch that are fun and entertaining.  Might I suggest Mario Kart?  You can start a new book series, go for a daily walk, or learn a new skill.  The key is to replace the time you would be feverishly checking your accounts with something else.

Stay Rooted

I graduated with my Master’s in 2009 and set out to find a job. I entered the labor market which was an absolute dumpster fire.  No one was hiring at the time.  The company I currently worked for was reducing benefits, freezing raises, and conducting layoffs. People were losing their homes, and I was submitting resume after resume with no call backs or offers. It felt like this was the new normal. The Great Recession of 2008⁴ was my first downturn as an adult and it hurt.  While money is important, it should not be where your true joy lies.  True joy comes from the positive relationships you have in your life and feeling the sun on your face. Suzie Orman has a great quote “People first, then things, then money”. If a downturn is negatively affecting your life, reprioritize what you value the most. Reconnect with people and things that bring you joy.  

Things Will Get Better

Here is a statistic that will give you hope. The stock market has recovered 100% of all losses. The disclaimer is, it took time. The Great Depression started in 1929 and the US didn’t fully recover until 1942. The Great Recession began in 2007, it took 4 years, 2011 to get back to pre-recession levels^a. To survive, you need to stay invested. Don’t let TV heads or internet personalities talk you into selling.  I still get fearful when things in the market look dark. I entered adulthood in 2006 after graduating from college. It was a difficult time for me to advance in my career.  I worked 2 jobs to make ends meet. I had roommates and lived at home for a time. It was not what I had expected but it was the reality of the world at the time. More than 10 years later, I look back at that time having learned some valuable lessons. The most important being how to survive until things get better.

Choose To Be Better

Sometimes the best thing to do is to do nothing.  When the markets are on fire your thinking needs to change. You may lose your job, your home and other things you value.  Mourn for those things. When you are ready you need to transition into survival mode. You may be living with your parents.  You may not be able to go to brunch every Sunday.  Your life may change dramatically. Embrace where you are now.  Find the silver lining. Without the trinkets of life, you may find new passions.  More businesses are created in times of recessions than any other time.  It may be that people have time to sit and think about what problems exist in the world and how they can solve it.  You can be better or bitter, choose to be better.

Play Defense and Offense

The best way to protect your capital is to invest in good companies and assets. In any downturn⁵, the investments that are the riskiest have a harder fall.  In 2008, Lehman Brothers held a lot of sub-prime⁶ and low-grade mortgages and as the housing market crashed so did their profits. By September of 2008, after 158 years in business Lehman Brothers was bankrupt. Holding risky assets sank their company.  In 2021, Gamestop (Ticker: GME), a struggling gaming retailer who sales had been declining for years saw its stock price jump to $469.42. As I write this, the stock price sits at $24.17.   Investors who bought and held GME an unprofitable, outdated company after it reached its peak are now experiencing a great loss. The key is to buy good companies at value⁷.  There is a saying “You make your profit when you buy” meaning you make the most profit buying low and selling high. 

During a bear market, if you are in a good financial position. Buy as many good companies as you can.  Dollar Cost Average (DCA)⁸ if you believe conditions will not improve soon. Get your cost basis as low as you want to be.

Glossary (You’ve learned a lot today!):

1. Bear Market-a time when stock prices are declining, and market sentiment is pessimistic. Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period. (Investor.gov)
2. Options-a financial derivatives that give you the right, if you decide, to buy or sell the underlying asset at an agreed-upon price and date.
3. Adjustable Rate Mortgages (ARM)– a mortgage where the interest rate is fixed for a period of time. After that, the interest rate applied on the outstanding balance resets periodically, at yearly or even monthly intervals. (Investopedia.com)
4. The Great Recession of 2008-The Great Recession refers to the economic downturn from 2007 to 2009 after the bursting of the U.S. housing bubble and the global financial crisis. (Investopedia.com)
5. Sub-Prime Mortgage– a mortgage given to someone with a low credit rating.
6. Value-The worth you have put on an investment. 
7. Dollar Cost Average (DCA)-buying an investment over time to lower your risk and average price paid.

References

a (Britannica, The Editors of Encyclopedia. “Great Depression: Timeline”. Encyclopedia Britannica, 23 Sep. 2020, https://www.britannica.com/summary/Great-Depression-Timeline. Accessed 12 June 2023.)

b (Duignan, Brian. “Great Recession”. Encyclopedia Britannica, 26 Apr. 2023, https://www.britannica.com/topic/great-recession. Accessed 12 June 2023.)