Mitigating Fear in a Bear Market

While bear markets are scary enough, this one not only came swiftly, but was also compounded by the uncertainty and fear of watching a global pandemic roll across America. This is not only affecting everyone in some way, but may also be infecting some of our own family and friends.  Worse, this is all unfolding as we look around at our communities, which appear as ghost towns as a result of social isolation. 

All of this is leading to an unprecedented amount of stress and fear. It is scary. Feeling fear is not abnormal, nor is it a sign of weakness. It is hardwired into us as a protective device. However, remaining in a state of fear can be paralyzing, debilitating, can cloud thinking, and can also be a health risk. Also, through what is called “potentiation”, fear is amplified when you are already in a fearful state. In other words, when scared, even harmless events can seem scary.  For example, while watching a scary movie starring a creepy-crawly creature, I have enjoyed lightly touching one of my children’s necks. What do they do – JUMP!  All of a sudden, something very harmless feels quite harmful! In other words, our “spider senses” are always tingling as they anticipate and exaggerate all other fears.

So, in times like we are in now, where fear is working on many levels, we all need coping strategies to manage the fear not only for our own health, but for the benefit of our wealth. There are a variety of methods to manage fear and stress including meditation, outdoor walks, and prayer. However, I would like to focus on four others for this article.

Gratitude
It has been said that when Warren Buffett wants to calm himself, he looks at pictures of his family. What do you think he is feeling as he looks at those pictures as a method of calming himself? Gratitude. When filling yourself with gratitude, it is very hard to also be in a state of fear and anxiety. Try it. First, close your eyes and think of those people, experiences, or things you have that you are grateful for. Second, focus on the strong feelings of gratitude you have for your wife, husband, mother, father, son, daughter, job, co-worker, health, God, relationships, experiences, etc. Finally, let the memories and feelings flow and grow as you fill yourself with appreciation and gratitude. Note how these feelings push fear away.

Limiting News Intake 
As mentioned earlier, fear can become amplified when you are already in a heightened and fearful state. So, how does the news play into this? It is taking our already heightened state and magnifying it by burying us in more and more bad news. Media companies are businesses, and their job is to reach and retain as many sets of eyeballs as it can by creating a sense of fear and urgency. 

Knowing this, I would simply attempt to limit the amount of news you consume and try to focus on the most objective sources of information (such as the CDC website in the case of the Coronavirus as opposed to say Twitter). For more on how to be intentional about Coronavirus news consumption CLICK HERE.

Focusing on the Controllable
Accepting the things that are out of our control, and focusing with courage on the things within our control makes us feel better. The Serenity Prayer, adopted by many 12-step programs, is proof that this works. What can we control at this time? We can control our portfolio including rebalancing, tax-loss harvesting, diversifying, and minimizing our costs. We can control our spending. We can control (to a large extent) the spread of the Coronavirus by following CDC guidelines. Humans are social creatures, so continue to connect with others (electronically) to talk about whatever it is you are going through. This alone helps to minimize fear.

We can’t control government policies, politics, markets, layoffs, or global pandemics.

Maintaining Faith in the Future
There have been, and will continue to be, great difficulties in the world and at times in our lives. We are most certainly living through these times now. There is always a real and painful crisis going on somewhere in our world (and even all over the world). It will be scary at times and it is normal to be afraid. If you don't believe that "this too shall pass," you have lost faith and will have great trouble successfully investing. I am talking about faith in the growth and progress of economies, businesses, and people (who work and own these businesses). This is faith in progress, not perfection. People, businesses, and politicians are not perfect, but if you take a step back to look at the upward curve of progress, it is easy to have faith. If you can't see this progress, and are fundamentally afraid of the future (and have lost faith), it is impossible to invest successfully.

No one can plan for the future without believing in that future. I believe that one of the keys to successful investing is to win the battle that takes place (in our mind) between our faith in the future, and our fear of the future. While we must live in a volatile world, we must act AS IF the future will be better. There will continue to be surprises and crises of horrific nature. When they occur, we certainly won't know under what circumstances things will turn out, but we must know THAT things are going to turn out alright. 

What is the alternative? To gamble against capitalism? This does not mean living in denial, or just acting like starry-eyed dreamers. We should have faith in the future, because the facts support that faith, not because we have blind faith. Things will not always be rosy, and are still downright painful for many people, but long-term progress and improvement will continue through both the good times and the bad. This progress is what we are investing in, and the world will benefit from this progress over time.

The Reward to Mitigating Fear
Is there a reward for managing fear in order to avoid giving up on a long-term investment plan? Let’s put it this way. The average bear market drop (for large U.S. stocks) has been about 33%, and the average number of years it takes to see new market highs is about two years. Therefore, mathematically, a 23% annualized return (including dividends) would have to occur during those two years to return to that previous high. If this particular bear market takes four years, large U.S. stocks would still get a very good 13% annualized return. Following its March 2009 bottom – down 57% -- the S&P 500 compounded at more than 14% annually for almost 11 years!   

Do deep bear markets sound like a time to sell or to buy? Naturally, stock markets could still go much lower, but regardless of where the bottom ultimately falls, future long-term returns will likely be quite good. 

Fear is working on many levels right now, but managing fear is both good for our own health, and also for our wealth.