Looking Forward to the Opportunities at the End of This Bear Market

Feb 24, 2023
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The stock market has few set rules. There are, however, certain truisms that have withstood the test of time. One is that bad market periods are always followed, in time, by good market periods. 

SMI was started in July 1990 during one of those bad periods. The U.S. economy entered a recession that very month. The federal budget was facing a large deficit, causing President George H.W. Bush to back down from his famous ‘’no-new taxes’’ pledge. Iraq invaded Kuwait that summer, and the U.S. sent hundreds of thousands of troops to Saudi Arabia. Oil prices more than doubled, contributing to inflation.

In only our fourth issue, I was already writing to our readers reminding them that bear markets are periods of opportunity. (That’s been a familiar theme over the years.) I called that editorial “Bear Market P.M.A.” Here’s an excerpt from the SMI archives from 32 years ago:

This month I want to encourage you to get ready for the bear market with a Positive Mental Attitude. I’m not saying we’re now in one, but if we are, are you prepared? Prepared to take advantage of it, that is. 

First, are you prepared financially? If you haven’t been investing with borrowed money, then you can survive any bear market. You just maintain your strategy and wait it out. But that’s looking at it negatively; lower stock prices are bad only for people who have to sell. They represent temporary bargain prices for people who have the money to buy. Are you prepared to systematically add to your holdings via a dollar-cost-averaging strategy?

Second, are you prepared psychologically? Yes, short-term we have problems. But the long-range outlook is exciting. Years from now, stock prices will be far higher than they are now. [Note: As expected, stock prices resumed their long-term uptrend. Now, in 2023, the S&P 500 Total Return Index is more than 22 times higher than in the fall of 1990, representing annualized gains of 10.4% per year.]

It is only through the down phase of market cycles that we are given the opportunity to buy at unusually low prices so we can sell later at high prices. Properly prepared for, bear markets are more of an advantage than a disadvantage. You need to embrace the mindset that a bear market in stocks is an opportunity, not a threat. 

You’re happy to take advantage of seasonal sales at the local mall, aren’t you? If you’re committed to the long-term with your investing program, you should have the same “opportunity is knocking” attitude about stock prices going “on sale.”

Investment rewards, for the most part, come from developing a well-thought-out strategy that focuses on quality investments, and then having the wisdom to wait for the markets to do what they have always done in the past — reward the patient investor.

We may now be living in 2023 (and doing less shopping at malls), but the risks to investors today are not unlike those of a few decades ago. And our counsel is the same as before — prepare yourself financially and psychologically for the next major buying opportunity.

Tactically, SMI’s approach has changed a bit. In 1990, we didn’t have Fund Upgrading’s defensive protocols or the Dynamic Asset Allocation strategy to help steer our buying toward the end of bear markets. Our suggested approach has tilted away from “keep buying all the way through the bear market via dollar cost averaging” to “buy when your specific strategy signals tell you to.” But the broad idea remains the same: we want to take advantage of lower prices created during bear markets to supercharge our long-term returns.

(SMI still recommends that members continue to DCA by adding to their 401k or other investment accounts every month throughout bear markets. The only difference is now we wait for the SMI strategies to signal exactly when to deploy that cash into new stock holdings.)

We deal with market risk by diversifying according to SMI’s trend-following strategies, which are designed to keep you on the right side of the market’s long-term upward direction. We may step out of harm’s way temporarily when our signals give us a bear warning. But that’s just to preserve our firepower for when we get the signal to get back in the game!

As the title of this editorial implies, a bear market can work to the advantage of the long-term investor. We’ve spent the last 32 years fine-tuning this process. Now it’s time to patiently follow it through until the next bull market begins.

Written by

Austin Pryor

Austin Pryor

Austin Pryor has 40 years of experience advising investors and is the founder of the Sound Mind Investing newsletter and website. He's the author of The Sound Mind Investing Handbook which enjoys the endorsements of respected Christian teachers with more than 100,000 copies sold. Austin lives in Louisville, Kentucky, with his wife Susie. They have three grown sons and many grandchildren.

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