Bear Markets Do End, But What Should Investors Be Doing Now?

These days, all investors want to know how long and how bad the decline will be. No one can answer that question definitively, though history provides some guidance, explains Richard Moroney, blue chip stock expert, a contributor to MoneyShow.com and the editor of Dow Theory Forecasts, the nation's longest-running financial newsletter which began publishing in 1946. Bear markets on average last roughly 12 to 15 months and decline approximately 33% from the peak. Of course, not all bear markets are the same. I expect this downdraft will fall on the shorter end of the range. While there is likely further downside ahead, I sense that the majority of the damage has already occurred. Indeed, the latest reading on our Intermediate Potential Risk Indicator is just 5% of the stocks on the New York Stock Exchange trading above their 200-day moving average. The reading has been lower only one time in the last 30 years -- in November 2008 through March 2009, when the financial-crisis-fueled bear market was laying a bottom. One key element of a market bottom is stocks remaining resilient in the face of negative news. Unfortunately, with every daily news cycle, it seems the declines build. For a market to form a bottom, stocks must stop going down on bad news. Whether the market is bottoming will be tested over the next six weeks as we learn more about the spread of the coronavirus, as well as hear from corporate America beginning in mid-April on the impact of the virus on corporate profits. Remember that going into this crisis, the three primary engines of sustained market moves -- corporate profits, interest rates, and inflation -- were bullish, the average stock was not outlandishly valued, and economy and employment numbers were still positive. Those factors should help facilitate a quicker and more robust rebound once the recovery happens -- and it will happen. There has never been a bear market that didn't recover, and that streak won't end. Most investors, even those near or in retirement, have an investment time horizon adequate to recoup bear-market losses, based on historical recovery periods. So what do I do now? At the end of the day, investors really have only three choices to make when managing an investment portfolio -- buy, hold, or sell. You should be constantly mulling those three decisions regardless of market conditions -- buy, hold and sell. Yet too often investors flee the decision-making process during market corrections or crashes. Or they go to extremes and act out of panic. We understand that the recent market action feels like it demands a response. But the response that usually accompanies such market downdrafts is panic. I've been in the investment business for nearly 40 years, and I can't recall a single instance when panic investing paid dividends in a long-term investment strategy. In fact, panic selling tends to happen at precisely the worst time and can weigh heavily on long-term returns. So, what should investors be doing now? Basically, they should be doing what they always should be doing as prudent investors: Buy Market crashes restore values and create opportunities for upgrading portfolios to take advantage of the inevitable recovery. Each of us has a finite amount of money to invest, so it behooves us to remain invested in our best ideas at all times. Market declines will broaden the pool of attractive values. If you don't buy during market declines, you neuter one of your most powerful investing weapons -- upgrading your portfolio. What should investors be buying right now? We can make a case that you need broad market exposure to a recovery, which points to putting some dollars into an index fund, such as the Vanguard S&P 500 exchange-traded fund. On the individual-stock side, I like a barbell approach. On one end of the barbell, add high-quality growth stocks that have become much cheaper. Stocks that fit this classification are Alphabet and Akamai Technologies . At the other end of the barbell, tilt toward higher-yielding stocks and perhaps some stocks in out-of-favor sectors. Stocks that fit this category include Bristol-Myers Squibb , Comcast , and JPMorgan Chase . Alphabet, Akamai, Bristol-Myers Squibb, Comcast, and JPMorgan Chase are all Focus List stocks. Sell There's a difference between panic selling, or haphazardly dumping stocks to numb the pain during market declines, and strategic selling, which considers proper asset allocation in conjunction with portfolio risk. Risk factors include overweighting a sector or stock, or carrying too much margin debt. Plus, you might need to raise funds to buy more attractive stocks. Again, investors should always monitor their asset allocation and risk levels, not just during market crashes. Portfolio pruning is necessary during market crashes, if only to raise funds that can be deployed in more attractive stocks. How do you know what to prune? Start with stocks that you own yet can't recall why you bought them, or that no longer satisfy the reasons you bought. If you can't justify owning them . . . and you don't believe they remain among your best ideas . . . sell them, and don't worry about taking a loss. Your investment dollars are too valuable to tie up in zombie stocks. Hold It is probably counterproductive to focus on whether the market is bearish when it comes to a long-term strategy, especially when investing in IRAs and 401(k) investment plans. Indeed, bear markets are usually measured in months, while investing for retirement is measured in years, if not decades. Thus, it is usually a mistake to drive a retirement account based on what may happen in the coming weeks or months. In fact, the right strategy might be to do nothing during market declines, especially in retirement-focused portfolios. Indeed, trying to trade in and out of retirement accounts to avoid declines is very difficult to do successfully over time. For long-term investors, especially those in IRAs and 401(k) plans, the biggest risk of investing is not being in the market when it declines, but being out of the market when it goes up. And your chances of missing big upward moves and new bull markets increase with increased trading activity. If you have what is an appropriate long-term investment allocation (stocks versus bonds versus cash), you may not need to adjust. And if you own stocks you believe will rebound well during the next updraft, holding those stocks makes sense.

Bear Markets Do End, But What Should Investors Be Doing Now?

At the end of the day, investors really have only three choices to make when managing an investment portfolio -- buy, hold, or sell.

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