I was perched upon a cracked leather stool in a dark corner of a steakhouse back in 2007, nursing a drink while my neighbor Bob explained why he was purchasing his fourth rental property with zero money down. Bob is the sort of man who thinks a silk tie makes up for a complete lack of personality. (It does not.) The room was heavy with the aroma of overpriced Cabernet and a specific brand of unearned confidence that usually precedes a total disaster. It was disgusting. Naturally, I went out and bought a property a week later. (I am still paying for that mistake, both financially and in the quiet corners of my soul.)
You do not require a magical crystal ball to make it through the market. You merely need to realize that the festivities always conclude before the sun actually starts to rise. It is an absolute certainty of life. The primary problem with the human brain is that it remains wired for survival on the prehistoric savannah, not for managing a retirement portfolio. (My brain is still convinced a rustling bush is a tiger.) We witness a green line climbing upward and our dopamine receptors start firing like a malfunctioning pinball machine. We think the line will go up forever. It never does.
The Math Of The Mood Swing
I recall the year 2021 with an almost physical pain. Everyone was a financial genius. My cousin Larry - who usually cannot manage to pair his own socks - was lecturing me about a digital currency named after a dog. (He is now living in my basement.) The reality of market cycles is much more boring than the internet would have you believe. The National Bureau of Economic Research notes that the average expansion lasts roughly sixty-four months, whereas the average contraction persists for only eleven.I We exist mostly in periods of growth, yet we dedicate all our mental energy to obsessing over the moments of shrinkage. It is a strange, miserable way to live.
During a standard bull market, the S&P 500 has historically delivered an average gain exceeding 150 percent over the course of several years.II I checked the data. It feels like a perpetual, golden summer where nothing bad can ever happen. You start to think you are a financial deity. Then the bear arrives. It does not knock. It just kicks the door down and starts eating your furniture. (I have lost a lot of metaphorical furniture over the last twenty years.) According to the Federal Reserve Bank of St. Louis, consumer sentiment often peaks right before the economy begins to contract.III It is the financial equivalent of feeling fantastic right before the flu hits you. (I usually feel great right before I trip over my own feet, so this makes sense to me.)
The Psychology Of The Panic
We must address why we are so terrible at this. My sister-in-law, Susan - who is a lovely person but thinks a balanced diet means a cookie in each hand - called me in March of 2020. She was screaming. She wanted to sell everything because the world was ending. (The world was not ending, it was just staying home and washing its hands.) A study by a major investment firm found that investors who stayed the course during the 2008 crisis had significantly higher balances a decade later than those who jumped ship. (The jumpers, much like Susan, usually wait until the market has already recovered to get back in. They buy high and sell low. It is a hobby for some people, apparently.)
Market cycles are a mirror image of human nature, which has not changed since we were living in caves. We are social animals. If we see the herd running, we run too. (I once ran three blocks because I saw a crowd running, only to find out they were just trying to catch a bus.) In the world of finance, this herd mentality is what creates bubbles. The Securities and Exchange Commission has often warned about the risks of market timing, yet we all think we are the one person who can outrun the bear.IV We are not. We are the slow gazelle at the back of the pack.
Building A Financial Plan That Outlasts The Next Major Downturn
So, what is your move when you realize the metaphorical bear is scratching at your front door? You do nothing. That is the hardest part. My financial advisor - a man named Howard who wears suspenders even though he does not need them - once told me that the best thing I could do for my portfolio was to forget my login password. (He was only half-joking.) The goal is not to time the market. The goal is time in the market. This is a cliché because it is true. It is also incredibly annoying to hear when you just lost twenty percent of your net worth in a week.
When prices are depressed, you acquire more shares. It is so fundamentally uncomplicated that it feels like some sort of deception. You must stop checking your balance every hour. It is a form of self-harm. According to a study by a major brokerage firm, the best-performing accounts belonged to people who were either dead or had forgotten they had an account. (I am aiming for the latter, eventually.) If you can survive the eleven months of pain, you get the sixty-four months of glory. It is a simple trade. But humans are not simple. We are messy, emotional creatures who want to run when things get scary. Do not run. Just sit there. (And maybe pour yourself a glass of wine.)
The market cycle is a grueling long-distance marathon, yet we insist on treating it like a series of frantic, breathless sprints. Take a breath. Slow down. You will observe that despite the sharp, jagged teeth of the bear phases, the general path has historically tilted upward. It is a jarring journey, but the final location is worth the bouts of motion sickness.
Critical Findings
The Core Truth
You cannot stop these waves, and you certainly cannot outsmart them on a consistent basis. The bull will make you feel like a deity, and the bear will make you feel like a failure. Neither is true. You are just a passenger on a very large, very old machine that has been running since long before you were born. (And it will keep running long after you are gone, which is a comforting thought if you do not think about it too hard.) If you can master your own reactions, you have already won. Stay diversified, stay patient, and for the love of everything that is decent, keep some cash available for the days when the steakhouse starts smelling like rosemary and excessive confidence once again.
The Answers You Are Looking For
How many months does a bear market usually stick around?
Historical data from the National Bureau of Economic Research indicates that the average bear market lasts about fifteen months.I This is significantly shorter than the average bull market, which typically spans several years. It feels longer because pain is a more potent memory than pleasure. (I still remember a bad burrito from 1994 more clearly than my high school graduation.)
What is the most reliable sign that a bull market is ending?
While individual stocks can go to zero, the entire market has never failed to recover eventually. The risk of losing everything usually comes from taking on too much debt or a lack of diversification. While technology makes trading faster, it does not change the underlying human emotions of fear and greed. High-frequency trading may accelerate the speed of the cycle, but it does not eliminate the cycle itself.
What should I do with my 401k during a market crash?
Most experts suggest doing nothing other than continuing your regular contributions. By continuing to buy when prices are low, you are lowering your average cost per share. Selling during a crash locks in your losses and prevents you from participating in the eventual rebound. (It is like leaving the movie five minutes before the hero wins.)
Does gold provide a better hedge during volatility?
Only if you plan on living in a bunker and eating canned beans. For everyone else, stay diversified. Gold is heavy and it does not pay dividends. It can be part of a strategy, but it is rarely the silver bullet people claim it to be.
How do I stop panicking when the news is bad?
Turn off the television. The people on the news are paid to make you feel like the world is ending. It sells soap and insurance. (I used to work in news, I am part of the problem.) Focus on your long-term goals and remember the sixty-four month average expansion.
References
Disclaimer: This article is for informational purposes only and does not constitute professional financial advice. Market investments involve risk and you should consult a qualified financial professional before making any significant money decisions. Seriously, do not listen to me, I once bought a house because Bob told me to.
