With stocks now well off their lows and the VIX crashing back to Earth, now is a great time to list out the lessons learned or re-learned about investing during bear markets.

Buying in a Bear Market = Brain Hurts

First: In the Bear Market Survival Guide, I encouraged the building of an “opportunity fund” or cash pile to be deployed during corrections and crashes. These are the times when stock soil is fertile, and seed planting has its highest odds of success.

But what I’ve rediscovered is that these are also the hardest times to put money to work psychologically. There are many reasons, but here are three big ones:

Reason one: When the S&P 500 is down 20%, it will look terrible, and you’ll convince yourself to wait to see if it drops 30%. Why buy now when a better discount is around the corner?

Reason two: The news on Main Street will always be terrible at market bottoms. It will likely remain bad even as stocks recover because equities are a forward-looking, discounting mechanism. In our current case, it’s hard to buy when people are dying. But if you wait until the coast is clear, until victory has been declared against whatever foe is ravaging the economy, then it’s too late. You missed the best part of the buying opportunity. Given the speed of the rebound, particularly with the Nasdaq, this fact is particularly true this go around.

Reason three: If an unemployment-crippling pandemic caused a bear market, and if you find yourself among those out of a job, that opportunity fund quickly turns into desperately needed money to pay your bills. Cash strapped, jobless citizens no longer have the capital required to buy market bargains.

Missed it by That Much!

Two: If you are fortunate enough to remain employed, and maintain the emotional fortitude to invest your opportunity fund, then you have to accept one incontrovertible truth – you will never buy the exact bottom. You’ll be too early or too late. Bank on it.

On March 9th, the S&P 500 was almost 20% off the highs and I told my wife stocks were crashing because of the Coronavirus. She told me to buy, echoing my frequently uttered teachings to put money to work when stocks are on sale. So I bought using an S&P 500 ETF in my wife’s IRA. One day later, I looked like a genius. One week later, I looked like an idiot. One month later, I’m up money, albeit slightly.

One answer to this disturbing reality is to scale-in. Split that cash hoard into multiple buckets to be invested at different discount thresholds (-20%, -30%, -40%, etc…). You can even automate it by inputting buy limit orders that are good till cancel. By presetting orders, you remove the emotional component of trying to decide on the fly and having to struggle with the psychological hurdles mentioned above.

I’ve expanded on this technique in this article and elsewhere.

Fortunately, I purchased more (in my IRA this time) of the S&P 500 ETF at a better price than my March 9th entry. Unfortunately, I didn’t buy as much as I would have liked. But isn’t that how it always is? If you bought near the low then you’re mad you didn’t buy more. If you purchased too early and the market keeps dropping, then you wish you purchased fewer shares.

If You Panic, Panic Early

Third: If you’re going to panic, panic early. I feel bad about any investors with long-term stock positions that puked it up near the March lows. This is a byproduct of over position sizing, bad planning, or both. You won’t make money owning stocks if you hold through -5% to -15% corrections but ultimately sell in a panic when the market’s down -20% to -40%.

Like everyone, I got stopped out of all bull swing trades during the initial stage of the crash. I also received a vigorous spankin’ on long-term stock positions, but I’m happy to report I held through the pain. And it was in large part because of proper position sizing. I had the exposure I was comfortable with. And because I learned long ago that selling after we’ve entered a bear market always leads to regret in the long run. Always!

What other lessons have you learned?

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