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What Have I Learned from this Bear Market?

I was doing my surfing around various financial forums, and came across an eye catching thread on the financial webring forum.  The thread subject was, what will you learn from this bear market?

After pondering this question for a little while, this is what I came up with for what I’ve learned thus far in this bear market.

  1. The Higher and Faster they Rise, the Harder they Fall – During the boom times, it was great to be in the commodities train as it seemed like nothing could lose.  However, like any bubble, they tend to burst.  A prime example is what’s happening to oil prices and what happened to technology in earlier this century.
  2. Even Strong Companies Fall in Price – With fear based selling in the markets this year, no one is immune.  The key is to keep your eye out for strong companies that have been irrationally sold off and showing signs of turning around.
  3. Never Try to Catch a Falling Knife – This rule is more for the stock traders out there.  Just when I thought that stocks were cheap, I started buying even though the markets weren’t showing any signs of recovery.  As a result, some of my purchases have fallen further, some as much as 50%.
  4. Financial Regulation is a Good Thing – This one is obvious now in hindsight.  Deregulation of the financial markets in the U.S lead to greed which in turn ultimately brought on the economic crisis.  On the other side of the coin, the Canadian regulated financial industry is relatively healthy (thus far).
  5. Fixed Income has its Place in Long Term Investing – As some of you know already bonds in a portfolio help reduce the volatility without sacrificing too much of your returns.  However, for those young investors with long investing time frames, it’s not uncommon to see portfolios with 100% equities to squeeze out every available percentage point.  For those of you sweating buckets due to seeing all the red in your portfolio, it may be time to revisit your asset allocation.

Now back to you, what have you learned from the current bear market?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 27 comments… add one }
  • Brad Castro December 3, 2008, 8:31 am

    I’ve learned just how important it is to invest only in strong, superior, high quality businesses. In bull markets, even mediocre companies can appreciate substantially in value. But in tough bear markets like this one, only a strong, superior, high quality business can give you the confidence that your investment won’t trade all the way down to zero.

  • Four Pillars December 3, 2008, 8:35 am

    I’ve learned that I can handle volatility – my shrinking investment accounts hasn’t bothered me at all.

  • Acorn December 3, 2008, 9:55 am

    1. It must be a Stop loss order in place for so called “large and stable companies” (not necessarily for penny stocks).
    2. Except if it is absolutely obvious for everyone, all these highly paid TV commentators have nothing to say conclusively about the next market move. So, listen to yourself first.
    3. I have to be a better options trader.

  • Gwaine December 3, 2008, 10:07 am

    1. I learned just how wrong predictions of the future can be. Reading articles from last year about the price of oil and direction it will take can be painfully funny.

    2. Dollar cost averaging. I’ve invested 1/5th of my cash into the markets and will sit tight for 3 months before throwing the next 1/5th. Takes the edge off of trying to catch that falling knife. I’m okay with not being “all in” if the markets turn around before I’m done buying.

    3. I always felt a bit weird with having a percentage of my investments in fixed income investments because their returns haven’t been all that stellar relative to equities. Those investments are now saving my left and right buttocks!

  • Dividend Growth Investor December 3, 2008, 10:10 am

    I was around the 1998 crisis and the 2000-2002 bear market,
    – What I keep lelearning is that one has to be diversified and not put all of their eggs in one basket. Domestic Government Fixed income is a good diversifier, which doesn’t correlate strongly with stocks.
    – A lesson that I keep seeing is that funds that use too much leverage, and funds that employ a particular strategy like covered calls or currency arbitrage are not good investments in the long term. The idea is to keep it simple
    – Don’t chase the highest yielding stocks, check how sustainable the dividend payment is
    – Don’t chase last years “hot” thing. A friend of mine was chasing last years plays in agriculture and China in 2008 and he lost much more than an index investor would have
    – Dollar cost averaging works in bear markets. Don’t invest everything you have at the same time.

  • The Reverend December 3, 2008, 10:14 am

    I learned to not view cash in my portfolio as a drain on my return during boom times but as money set aside waiting for the next great buying opportunity during these down times. I get antsy with too much cash in the portfolio and want to redeploy it too quickly.

    Of course cash would have been great for a another reason during this downturn.

  • Money Minder December 3, 2008, 10:30 am

    I’m guilty of #3. I’ve tried to catch a few falling knives. They kept falling. Luckily I have time on my side – I’m not too worried about them making a comeback (eventually) :)

  • Finance_Addict December 3, 2008, 10:59 am

    I’ve learned to always consider the worst case scenario when making an investment decision.

    I’ve also learned that nothing is out of the question when things turn bad (i.e. 50% drops, dividend cuts on stable companies etc.)

    I’ve learned to not trust almost everything I hear of read regardless if it’s from a so called expert or a company CEO.

    I’ve learned that the saying “When it rain it pours” can feel real in times like these.

    I’ve learned the hard way to be more disciplined with my risk vs. reward choices.

    I’ve started to question what really moves markets in time like these. Option trading?

    I’ve learned that I refuse to sell low and give my money away. I’ll hang on the for the ride.

  • Nurseb911 December 3, 2008, 11:02 am

    I’ve learnt that effective diversification (not so much asset allocation, but sector) can do a lot of good in helping to minimize overall negative performance of a portfolio. Over the long-term this will be a buying opportunity for an individual such as myself, but staying rational is difficult and will test your will no matter your discipline or patience.

  • Yikes! December 3, 2008, 11:41 am

    I have learned that this is not the time to be playing games in the House of Commons.

  • FearLES December 3, 2008, 12:07 pm

    I learned about the catching falling knives and dollar-cost averaging as I made a sizable first stab at the Smith Maneuver in the first week and a half in November and have seen things drop since then… on the other hand you can’t time the bottom so do it in steps. That said I am still happy with what I bought.

    TCK.B is an exciting stock… too bad about the dividends but they will rebound as they are really cheap now.

  • FearLES December 3, 2008, 12:16 pm

    I also learned that maybe you shouldn’t wait for the real killer bad news before getting out. We all knew that something was going to burst in the US, we just didn’t know if was this big or this inter-connected.

  • Rocket Spanish December 3, 2008, 1:45 pm

    I think most people would also learn that even though they say they are doing a buy and hold strategy, it is easier said than done, because the moment you see your stocks falling the rules change even for experts

  • Geoff December 3, 2008, 2:45 pm

    I’ve learned (and re-learned) that:

    1) one man’s bear market is another man’s bull market
    2) portfolio theory is hogwash (risk models, etc.)
    3) if you create regulations, people will go around them
    4) you have to let things fail
    5) paper is nothing. tangibles are everything
    6) debt is to be avoided at all costs, savings a must

  • Mr. ToughMoneyLove December 3, 2008, 3:03 pm

    I’ve learned to re-direct my free cash to a sure thing investment: paying off my mortgage, giving me a guaranteed 6% tax free return.

  • Sonny December 3, 2008, 4:20 pm

    I’ve learned that we haven’t really learned anything We said we learned something when the tech bubble burst. Back then we thought we could buy anything with .com and the stock would go up. Then when the bull came, we bought anything with oil or real estate.

  • Geoff December 3, 2008, 4:52 pm

    Sonny: I think yours is the best answer yet!

  • John Doe December 3, 2008, 4:57 pm

    Know your stops and stick to them….especially in a bear market with exceptional uncertainty.

  • Craig December 3, 2008, 6:16 pm

    Good advice and I’m sure like anything else, it will only educate you further in the future when things get better again. Help have a more long term outlook and be proactive in the future.

    Craig
    http://www.budgetpulse.com

  • Scott December 3, 2008, 9:58 pm

    @ Sonny: of course we haven’t learned anything — EVER!!! Well, except maybe that the Earth really is round and not flat. Why do you think the world is the way it is? The only thing we have learned is how to slop the sheen of sophistication over our basic human instincts and traits (eg. fear and greed). Don’t forget (or now learn) that the markets are merely a function of human behaviour.

    There will come another Bull and yet another Bear, all linked with bubbles and crashes and booms and busts. Life will go on. You’ll tell your grandkids about the Crash of ’87…and ’00…and ’08…and…well, you get the point.

    What did I learn?: You get what you pay for.

  • WeSeed Writer December 4, 2008, 1:44 pm

    That history repeats itself. And then it does it again and again. That’s at least some consolation to all the stuff going on right now. It has happened and will continue happening. But so will the recoveries.

  • Will December 5, 2008, 12:20 pm

    interesting site it really learns me a lot.

  • Will December 5, 2008, 12:22 pm

    thanks for the information i will apply that.

  • Kam December 7, 2008, 2:19 am

    I learned to use a tight stop losses in a bear market. I learned how to believe in bonds and T-Bills. I learned how to step to the side line and not to jump into any stock before doing lots of research. Fluctuation in gold prices was a good time to trade gold.

  • Mark Wolfinger December 12, 2008, 11:36 am

    Hedging is essential – in good times or bad.
    Conservative strategies, using stock options – are the best tools available.

  • Alin December 28, 2008, 2:26 pm

    That’s right! Very good article Frugal! And I think it is room for even more downside in the stock market. Why? Because the outlook for 2009 is not so good. I wrote more about that here http://think.rentacar10.eu/?cat=4 You can check it out.

  • Mark January 1, 2009, 7:07 pm

    All good points. I am glad that some good thinds have come out of this bear market.

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