Jan 25, 2016

Eat the bear.

The Stranger: Sometimes you eat the bear, sometimes the bear eats you.The Dude: What is that, some sort of Eastern thing?The Stranger: Far from it, dude.

A bear market occurs when the major indexes post a decline of 20 percent or more. Statistically speaking, U.S. stock markets and many markets globally, including those in the Middle East and southeast Asia, are in bear market territory.

Now I think back to my outdoorsman training and what to do in the case of a bear attack. As a fat, fleshy human who normally doesn’t carry around a gun, bow, or large blade, my first instince upon seeing something like a huge grizzly would be to turn around and run – but that’s not what you’re supposed to do. The first and easiest correct response to an aggressive bear is to play dead – in the investing world, this would mean to not do anything — If you’re under 40, that’s not necessarily terrible advice in a bear market.

The second thing you can do is to fight back – specifically, hit and kick the bear in the face as hard as you possibly can. In the markets, this would mean buying more stocks and funds, and buying aggressively.

As a relatively young investor who’s accounts are more impacted by my regular contributions than the temperament of stock market investors, I love a bear market. I love it so much that I’m going to punch the bear in the face. In fact, I’ll do one better: I’m going to eat the damn bear.

How often do these opportunities come about? Since 1945, there have been 20 market corrections and 12 bear markets, not counting the current one. This happens once out of every six or seven years. This isn’t time to panic.

See, for long-term investors, the typical advice during bear markets and market corrections (market declines between 10 and 20 percent) is to bargain hunt, because stocks are cheap, and to rebalance your portfolio, because a decline in stocks will by necessity cause the fixed income, or bond, portion of a person’s portfolio to take up a larger portion.

For example, if my portfolio is 60 percent stocks and 40 percent bonds and stock markets decline by 20 percent, the stock portion of my portfolio also declines by 20 percent. If, for the sake of simplicity, we say that the bond portion is static, my portfolio is now 48 percent stocks and 52 percent bonds. Rebalancing means selling off 12 percent of those bonds and re-investing in stocks. That way, if-and-when the market turns around, I have repositioned capital to take advantage of the recovery.

But my super-aggressive passive-growth philosophy has me 100 percent in stocks, and it has declined about 20 percent since the beginning of the year. Time to panic, right?

Not really. Instead, it’s time to bargain hunt – and even though I’m a passive index fund investor, I can still take advantage of ‘bargains.’ In fact, it’s a perfect time for me to consider buying while the prices are low. For example, my core investment, Vanguard’s S&P 500 index ETF, dipped down below $168.00 a share last week, triggering a ‘limit order’ I placed with my brokerage to buy some shares. Now, share prices are back over $173 as stocks have enjoyed a mini-bounce over the past few days.

I call it a bounce, and not a recovery, because most market analysts predict more downward momentum before the market begins to recover as the impacts of interest rate hikes, a sputtering Chinese economy, and low oil resonate globally.

For those of us working with a brokerage or a discount brokerage directly as retail investors, a limit order sets up a contract to buy shares of a particular stock or fund when the share price goes below a certain level, or to sell shares when the price goes above a certain level.

If I set limit orders at regular increments, I can average into my favorite stocks and funds as market panics cause other investors and traders to sell at increasingly lower prices without the worry of timing the market.

Example: During the first week in January, I had a little bit of extra cash in a money market settlement account with my broker, and that was enough to buy shares of the Vanguard 500 index ETF, or VOO, when they reached $168. So, acknowledging that the market was heading downward, I set a limit order at $168. My brokerage will honor a limit order up to 90 days after it is established, so on Wednesday when the markets continued their plunge and VOO’s price sank below $168, my order executed and I became the proud owner of additional shares.

Now if my guess moving forward is that economic data won’t help the markets moving forward, I can set additional limit orders, preferably at lower prices – so I could order to buy when VOO shares pass below $166, or $160, or $120 (while there are some prognosticators who believe the S&P 500 could lose enough of its market capital to push VOO shares that low, I think that’s pessimistic), and if the price goes that low in the next three months, I own more of the fund.

Keep in mind that at the beginning of November, I bought eight shares of VOO at a price of $193 a share, so if the market corrects back to that level this year, I’ll have made $25 per share in unrealized gains on the VOO I bought earlier this month, and even more from shares bought while VOO was lower.

For young investors, then, bear markets are an opportunity. I’m considering increasing my 401(k) contributions and taking a little money out of my cash reserves to buy in while the buying is good.

How long, on average, does a bear market last? Around 14 months. I hold that the market decline really started at the end of Aug. 2015, when the markets were down significantly on bad news from China. That gives me until the beginning of November this year to buy in.

Thanks to having some hunters in my group of family and friends, I’m no stranger to game meat, but I’ve never eaten bear.

But from an investing perspective, bear markets are pretty delicious.

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