It's been several years since we have seen anything close to a bear market, as defined by a 20% or greater decline in equity prices. Sure, there have been a few 10% corrections, but volatility has been pretty low, and stock market gains have been pretty consistent.
So, are we "overdue"? In many ways, that's an invalid question. If history is our guide, it's a virtual certainty that a bear will be back sooner or later – but we can't say when. Since bear markets have no expected due date, there's no such thing as "overdue."
More helpful questions are how best to prepare for future bears and how to prudently respond when they appear. For that, I have a real-life story to share, based on my recent encounter with a flesh-and-blood bear.
A few weeks ago, my two teenage daughters and I went backpacking on the Olympic Peninsula. The Enchanted Valley just outside of Lake Quinault has long been on my must-see list, so it was a special time for me and my girls. They were quite the troopers, being without Internet and with Dad for so many days straight.
Our trail mostly followed the Quinault River through the valley. We were surrounded by soaring mountains, bright meadows, sparkling glaciers, and a profusion of flora and fauna … including, we were forewarned by the rangers, lots of bears.
Oh well, that's Mother Nature for you. We hiked along the first few days, reveling in the splendor. Then, on our third day, it happened. A very large, very black bear appeared on the trail about 75 yards ahead of us, casually lumbering our way.
I've encountered bears before while hiking and have learned they usually opt for flight rather than fight at first sight. This bear? Not so much. He didn't even break his stride. With my girls huddling quietly by my side, I decided to speak to him as calmly as I could. After all, bears aren't known for sharp eyesight so maybe he hadn't seen us.
"Hello Mr. Bear," I tried soothingly. "That's close enough, if you don't mind."
Still no response! With that, I decided it was time to break out the bear-powered pepper spray. Thankfully a quick "warning-shot" did the trick, sending him scurrying into the brush. He seemed familiar with the stuff.
Whew. Now, bear with me while I translate my encounter into three financial lessons for bear markets.
1. Be Ready.
The Olympic National Park rangers were helpful, but adamant: Bears are part of the landscape. You may see them anywhere, anytime, so don't be too surprised when you do. Same thing for bear markets. On average, they come along once every several years. Some may skitter away quickly; others may stubbornly hold their ground. That's the nature of investing, and it means you must …
2. Be Prepared.
While bears are to be expected in the financial and forested wilderness, since we can't predict when or where, your best defense is to prepare for them well in advance. On our hike, we were strongly advised to carry strong bear spray (thank goodness!) and to bring bear-proof cans to store our food at night. For my clients' financial journey, I advise them to structure their investment risk exposure and cash-flow plans assuming they'll likely encounter a beast or two somewhere along the way. That way, when it happens, we shouldn't have to panic or drastically shift course. Instead, we are better positioned to …
3. Remain Calm.
While there's no sure-fire way to ward off every bear in the woods, I'd like to think I gave us our best shot at a good outcome by employing calm resolve in the face of the threat. It also helped to rely on the advice I knew about bear "management." Likewise, bear markets can be unnerving, especially when the news outlets and prognosticating pundits start yelling that you'd better DO SOMETHING FAST. It may be tempting to react in a rushed panic, but you'll usually be better off if you stay calm and rely on that thorough preparation I just mentioned.
If you were expecting a prediction on when and how severe our next bear market may be, I'm sorry to have taken your time. I simply don't know, and I don't believe that anyone else does either. However, by understanding how to employ calm preparation and well-informed advice to defend against financial and physical threats, you stand the best chance of preserving your investments – and your skin.
Is your best bear management plan not yet in place? Reach out to me and I'd be happy to help.