Bear markets are inevitable but too often we are our own worst enemy when we must navigate one. The problem is that we become more emotionally driven. It is well known in behavioral economics that we feel the pain of a loss much more acutely than we feel the pleasure of a gain.
The initial reaction of most people when faced with losses is to freeze and hope that the situation will correct itself. In a upward trending bull market that is often a wise choice but when we are faced with corrective action like we have experienced for that last 2 ½ months it is recipe for pain.
Too often this period of inertia is followed by giving up out of disgust when the pain lasts too long. We simply want to escape the situation that has caused so much stress and it doesn't much matter what the selling price might be.
The easiest way to lose a lot of money in a poor market is to not have a plan. When we don't know what we are going to do then we react emotionally and that leads to poor decisions.
Even those that have a plan will often fall victim to 'style drift'. The short term trades that don't work turn into long term investments and the long term investments that are struggling are dumped as we grow weary of losing money.
The first step to dealing with a difficult market is to have clarity of style. If you have a clear style then you are well on your way to having a plan.
If you know you are a long term investor that is trying to find stocks to hold for many years you will view the action in a much different way than a short term trader that holds high levels of cash and tries to pick off a few trades here and there.
Back in the early 2000's there were endless stories about investors that made a fortune during the internet bubble of 1999-2000 and then gave it all back when the market came crashing down. They simply sat there and did nothing as the market trended downward for years. Some justified it by calling themselves long-term investors but the problem was that they were not holding stocks that were good long-term investments. The good ones come back but the great bulk of them never did.
Doing nothing may work if you are a Warren Buffet and can hold an individual stock that doesn't do anything for a decade or more but that is a much harder approach than it sounds. There is only one Warren Buffett because what he does is very hard. There are only a very small number of stocks worthy of being held for a long time.
What really hurts most individual investors in a poor market is that they try to use the mutual fund model of investing. They stay heavily long with cash levels of just 10% or less and then count on strong fundamentals to provide support for the stocks they like.
In a bear market fundamentals don't matter. Just look at how Apple (AAPL) has been hit recently despite a story that has endured for years. All the fundamental analysis in the world will not provide good support when the market has few buyers.
Those that use the mutual fund approach to investing are prone to changing their strategy as the incur losses. They start to question the strategy and when the losses continue too long they throw in the towel.
In a poor market you either have to have extreme patience as you wait for long term investments to develop or you have to use extremely short time frames as you pick off some quick trades and hide in cash.
There are pluses and minuses to every approach and you have to decide what works best for you. Just make sure you have a plan. Don't allow your emotions to drive your decision making. Bear markets are actually a great positive if you approach them in the correct way. They create new opportunities and plant the seeds for the next major rally.
What is your plan for this market right now? Are you sitting and hoping that things will turn back up and your losses will be reduced? What will you do if that doesn't happen soon? Are you prepared to wait patiently as more losses occur or do you have a line in the sand?