Fending off the Bear

Investing during a crisis requires a certain amount of imagination. You have to imagine yourself ultimately being successful even though it’s tough in the present. And you have to imagine analogies to help get you through since a good chunk of the investing process is psychological. Maybe it’s the old “marathon and not a sprint” comparison, or perhaps the “farmer versus hunter” analogy. How about avoiding succumbing to a bear market by actually fending off a bear?

The following article from Jason Zweig of The Wall Street Journal resonates with me for multiple reasons. The author expands on themes I’ve addressed before about how to view bonds in your portfolio, about the insultation they can offer. Social Security and pensions offer similar protection but are rarely thought of in that way.

The piece also reminds me of my own bear experience deep in the Sierras. It was a large black bear and not a grizzly, and I remember feeling exhilarated and unafraid. I knew enough to remain calm and try to appreciate the experience because it wasn’t going to last. Maybe I’m jonesing for some social distancing out in the backcountry…

The “fending off a bear” analogy is a good one for obvious reasons. Markets are exceptionally volatile and even though prices have risen in recent weeks it’s still a very uncertain environment. So, in a sense, long-term investing these days is like dealing with an unpredictable wild animal standing in your path. You can’t turn back and the next steps you take are critically important.

Click below to read the article, “The Bare Necessities You Need for a Bear Market”. The additions in italics are mine.

Remain calm. Get big. Move sideways, slowly. A lot of advice for surviving a falling stock market will sound familiar to backwoods hikers who’ve had grizzly encounters.

Investors can survive a bear market the same way hikers survive an encounter with a bear: Remain calm and don’t make sudden moves.

With some modifications, the National Park Service’s advisory on how to behave if you come across a bear in the wild is a surprisingly useful guide for investors as well.

“Make yourselves look as large as possible,” advises the park service. Do that in a bear market by remembering that we all hold an implicit position in bonds, making our portfolios much bigger than we normally realize—and our exposure to stocks proportionately smaller than we usually believe.

Let’s say you and your spouse are 45 years old and expect to earn $2,000 apiece in monthly Social Security benefits.

OpenSocialSecurity.com, payments for the delay until you receive them. The $2,000 a month that you and your spouse will each receive in the future has a present value of $772,235, according to OpenSocialSecurity an excellent online tool designed by accountant Mike Piper, adjusts your expected Social Security.com.

That’s roughly what it would cost an insurance company to provide each of you with a guaranteed, inflation-adjusted $2,000 monthly payment for the rest of your lives (assuming you file for retirement benefits at age 70 and your spouse at 62).

So your expected Social Security payments are like a giant phantom annuity—a bundle of inflation-adjusted bonds you don’t own but whose income you have the right to receive. The same is true—usually without the ability to keep pace with inflation—if you are fortunate enough to have a defined-benefit pension plan.

Social Security, or the company providing your pension, could fail. But, if it doesn’t, putting the value of those phantom bonds on your mental balance sheet will remind you that your total portfolio is bigger than you thought and less exposed to stocks than it seems. (You can also look to the bonds in your portfolio as further insultation against stock market volatility. If you’re retired and using your portfolio for living expenses, you may have multiple years’ worth of non-stock investments to spend. This could be enough to maintain your personal spending without having to sell stocks in a rough market.)

Other advice from the park service also applies to bear markets: “If the bear is stationary, move away slowly and sideways; this allows you to keep an eye on the bear and avoid tripping…Do NOT run, but if the bear follows, stop and hold your ground.”

To move sideways, you can take three steps after consulting your accountant or financial adviser. (If I’m managing your portfolio, I’ve been doing these three things on your behalf already.)

First, harvest tax losses. Sell stocks, funds or other investments whose market price has fallen below what you paid. Think of the resulting difference not as a loss, but as an asset. That’s because you can generally use it to offset capital gains now or into the indefinite future, or to deduct up to $3,000 of it against your ordinary income annually.

You can immediately put the sale proceeds into a similar, but not identical, investment. (A simple example: Switch from an index fund tracking the S&P 500 to a total stock-market index fund.) That way, you keep your investment plan intact, but Uncle Sam eats some of your loss.

Second, consider converting a traditional Individual Retirement Account to a Roth IRA. The amount you convert will be added to your taxable income this year, but the market decline has almost certainly reduced that. Under current law, unlike in a traditional IRA, withdrawals from the Roth will typically be tax-free down the road.

Third, “sell your dogs,” urges financial adviser Allan Roth of Wealth Logic LLC in Colorado Springs, Colo. The market plunge has likely reduced or erased the embedded gains you had on your less-attractive investments, meaning you now could sell them without incurring a big tax bill.

The same logic applies to concentrated positions—a big chunk of shares you inherited, or stock in the company or industry where you work—that you’ve been locked into by a reluctance to pay capital-gains taxes.

You should feel “less unwillingness to unwind them now that the market is down,” says Maria Bruno, head of U.S. wealth-planning research at Vanguard Group. “You can clean it up and improve the diversification of your portfolio.”

To ensure you’ll follow through on these actions, turn social distancing into an asset, too. Now that you have spare time on your hands, tell your family or friends out loud (virtually if need be) about your portfolio cleanup plan and set a date for it within the next few days. Ask them to hold you to it. That follows another of the National Park Service’s guidelines: “Continue to talk to the bear in low tones; this will help you stay calmer, and it won’t be threatening to the bear.”

When you do make your trades, enter them after market hours, so momentary price swings won’t sway your resolve.

A final thought from the park service: “Hike and travel in groups…because of their cumulative size, groups are also intimidating to bears.”

No, you can’t scare away a bear market just by grouping with other investors. What you can do, though, is lower your anxiety by tuning out toxic influences urging you to trade, time the market and make sudden shifts in strategy. Screen out commentators and analysts who can’t think beyond this week’s headlines, and seek out investors who focus on the long term. (Additionally, I highly suggest unplugging from the news, perhaps even just for a day. Listen to music, read a book, take a hike in the woods even if you have to sneak in… it all helps to reset your mind and keep you sane. The news will still be there tomorrow.)

Here's a link to the article on the WSJ’s website:


Have questions? Ask me. I can help.

  • Created on .


  • Phone:
    (707) 800-6050
  • E-Mail:
    This email address is being protected from spambots. You need JavaScript enabled to view it.
  • Let's Begin:

Ridgeview Financial Planning is a California registered investment advisor. Disclaimer | Privacy Policy | ADV
Copyright © 2018 Ridgeview Financial Planning | Powered by AdvisorFlex