How to react to a bear

Simon Brown, founder and director of
Simon Brown, founder and director of

As I write this, a week or so ahead of you reading it, our local Top40 index is off 20% from the intra-day highs of mid-November 2017*. 

That is officially a bear market, which is measured as a 20% drawdown from a high.

If you only started investing post the global market meltdown of 2008/09, welcome to your first bear market.
Don’t panic.

Falling markets never feel nice – your investments are losing value and you’re scared to put new money into the market in case things fall still lower. 

And, if enough people feel this way, the buyers largely disappear and markets head even lower.

The reality is that market sell-offs are usually a common event. 

But the last decade since the credit crisis has not been a normal market – fed by record-low interest rates (negative in some quarters) and massive quantitative easing (government buying of bonds to flood markets with cash). 

Generally, a market will experience a 10% drawdown every couple of years, with a 10% to 15% drawdown every five years, and a +20% drawdown every five to ten years.

The really big hitters – as we saw in 2008/09, with global markets off between 40% and 50% – are rarer events, with only two in the last 100 years (the previous was 1929).

So, what we’re seeing play out in our local, and other global, markets is something that should be fairly common, albeit not for the last decade. Newbies to the market have never seen anything like it – and are panicking in some cases. 

But, as I always say, while panicking is sometimes useful, it’s only really useful in a crisis – and a gentle bear market is not a crisis.

Important to note about this bear market is that it has not been driven by a crisis. 

As such, it’s very unlikely that we’ll see another 40% sell-off.

Crises are mostly driven by out-of-control debt and, aside from governments around the world, we’re not seeing excessive corporate or personal debt levels. 

Moreover, government debt is manageable as they control the printing presses. Not a great solution, but it works.

That said, I am also not saying the bear is over. We could go lower, or perhaps experience another sideways period of going nowhere slowly – as we’ve seen for much of the last five years. 

I suspect the driver here is going to be US markets that are still in a bull phase, even after the recent sell-off. 

If those markets continue to sell off, it would very likely result in us heading lower.

So, what’s an investor to do? The same as always: Continue with your exchange-traded fund (ETF) purchases and buy the quality shares, making sure you leave the dogs alone.

If you’re worried the quality may get still cheaper – and it may – you can place some cheeky bids below current levels. Our market is very cheap on almost any valuation metric, but, as always, I am pretty much fully invested. 

I have some buy orders in on stocks I like and, as I have previously written, I am avoiding small- and mid-cap stocks.

So, sit back and take in your first bear market. 

Remember the details so you can regale your grandkids one day when they ask about the great bear of 2018.

Except, they probably won’t be asking about the 2018 bear because on long-term charts we can hardly even see these bears. 

Instead, you should relax and remember bear markets happen, but they also pass in time.

*By the time I had finished writing the column the market was green.   

This article originally appeared in the 8 November edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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