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How do I avoid bear markets?

Ok, so full disclosure up front that you need to know and that’s that you technically can’t avoid a bear market but you can be ready for one. The good news is that if you’re ready then you can come out the other side feeling like you actually did avoid it completely.

The secret is to be aware of the three P’s of investing –

  1. You can’t Predict the bear market
  2. You can’t Prevent the bear market
  3. You can Prepare for the bear market

As poor returns and bad weather are inevitable, we believe that investing is a lot like farming:  it’s not a matter of ‘if’ a drought is going to occur it’s only a question of ‘when’.

Missing the best days

If you actively go chasing performance based on what you predict markets to do then you may be successful in missing the worst of times however once you’re out of the market then you need to make a decision to get back in at some stage.

It’s very easy to get the timing wrong and the consequences are enormous.

To illustrate, if you had invested $10,000 in December 2000 in Australian shares and held onto it for 20 years then you would have had $49,071 in December 2020.

But, if you had decided to switch in and out of your investment because of your predictive wisdom at various points in that period to miss the worst days then you may well have also missed some of the best days considering they tend to occur within a short period following.

It’s very easy to be out of the market for too long and exceptionally difficult to know when the highs and lows are going to occur. By missing just 20 of the best days of returns in that 20 year period your investment at the end would only have been $20,011, that’s 59% less than if you’d just been patient.

Don’t be The Chaser

The Chaser is someone who goes hunting for the best performing investment and switches their assets to where the highest returns are. It seems to make sense but this is a bit like a farmer doubling down on a winter crop solely because the rains last year were good and completely ignoring the fact that this year’s rain could be completely different.

Let’s take a very long term view of things by comparing a person who starts with $100,000 and then in January of each year invests all of their money into the best performing investment class of the previous year with someone who stays in the same investments year in and year out without any changes at all.

Let’s take this over a 40 year timeframe from 1980 to 2020. Forty years is becoming the usual period to be retired for!

The Chaser has $2,800,168 whilst the patient investor has $5,970,444. That’s 113% more with literally no effort except patience!

Time vs Timing

Since 1994 research firm Dalbar has published it’s Quantitative Analysis of Investor Behaviour results which reflects the effects of investor decisions to buy, sell & switch in and out of managed funds over a rolling 20 year period. Every March they release their report of the 20 years up to the 31st December in the previous year.

Their most recent report covers from 2001 up to the 31st December 2020 and the results continue to be illuminating to how our own investment behaviours can actually be the most destructive to our wealth.

Over this 20 year period, the average (US) investor received a compounding annual return of 5.96% yet the S&P500 index produced 7.47% per annum for the same period.

This is a difference of 1.51% per annum over a 20 year period for doing absolutely nothing except being patient and not letting your fear or greed takeover and make you try and outperform the market.

Hang in there!

Does your vision of your richest life have no debts, lots of time with family, plenty of holidays and enough financial resources that enable you to make your best possible choices?

Every little bit of return is going to help you achieve your goals so be very conscious of your behaviours that undermine your ability to choose the best for you and your family.

Remember that:

  1. Stay invested so that you don’t miss the best days
  2. Stay invested instead of chasing the best returns from last year
  3. Stay invested over time instead of trying to time your investments

There’s a common theme here isn’t there?

Patience is your greatest asset as an investor and by giving yourself the ability to let your patience have the power it deserves, then your richest life beckons just around the corner!

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