How to Invest in the 2020 Bear Market
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We have just reached a new bear market due to the fears of the coronavirus pandemic. The chances are that this is your first bear market. And the chances are that you are freaking out.
Today, I want to cover how to invest in a bear market and what to do when a bear market strikes.
But first of all, you should focus on your health with this coronavirus. I hope you and your family are healthy! Money is useless if we are not in good health to enjoy it! Make sure you follow the rules set by your country and your company. And remember that while you may not be at risk with this virus, many people are! Do not spread it further!
Once you have taken care of your health for the near future, let’s see what we can do with our investments in these trying times.
Bear Market
Let’s start at the beginning: What is a bear market?
A bear market is a state in which a stock market is when it has lost 20% since its high. The bear market will persist until the market is back to where it started before the drop.
The duration of a bear market can vary a lot. Some have lasted a few years, but some have laster for several years. On average, bear markets have lasted nine months.
On March 11th, the U.S. stock (and most of the world stock markets) entered a new bear market after falling more than 20%. This event stopped a bull market of 10 years, the longest bull market in history.
This bear market also shows a swift entry. It only took a few weeks to fall by 20%. Historically, it took much longer to drop that much. It could indicate that this bear market will be short-lived. But nobody knows that yet! We will have to see how it goes!
Before that, the previous stock market occurred during 2007 and 2009, caused by the subprime mortgage crisis. During this time, the S&P 500 lost about 50% of its value.
Do not panic during the bear market
The most important thing about investing during a bear market is not to panic. The worst thing you can do is panic and sell all your shares.
Remember that you are in the stock market for the long-term. Stick to your plan!
Also, bear markets have always occurred in history. The stock market is cyclical. We just went into a new cycle. And this new cycle was long due. You knew that when you started investing. And you still know that now. Investing in a bull market is easy. It is during bear markets that investors are making mistakes.
There are a few things you can do to help yourself during these trying times:
- Do not check the stock market every day
- Remind yourself that paper losses stay on paper until you realize them
- Remind yourself that bear markets have always ended. On average, the stock market has been going up.
- Remind yourself that this is something that already happened, and that will happen in the future again.
Play Dead
Do you know what you should do if you encounter an actual bear in a forest?
You should play dead. There is no point in fighting a bear. And running away from him will just encourage the bear into making you into his lunch. And we do not want that!
It is the same during a bear market. Stay calm and just wait until the bear market is over. It will go away. You just have to wait for it and endure it. It may take months or years, but the stock market will recover.
Do not time the market
Once a bear market starts, many people try to sell their stocks and buy them later. By doing that, they can purchase shares at a lower price than when they sold, hence making a profit.
You should not attempt that! Most people that are doing that end up buying higher than they sold. Or simply, the stock market will directly jump higher after they started selling.
And you have to consider the transaction costs of doing that. Buying and selling are not free actions!
Doing that is pure market timing. You should not do that. A few people may win at this game (gamble!), but most people will lose money!
Do not stop investing during a bear market
One thing that a lot of people do during a bear market is to stop investing! You should continue investing.
If you are investing for the long-term on a monthly (or more) basis, you should continue your investments.
For a shopper, a bear market offers some exciting discounts. You need to take advantage of them. If you are investing for 20 years in the future, it is better to buy at -30%! If you believe in buying shares at 100% of the price, you should still believe in buying shares at a 20% discount!
Continuing to buy can make a significant difference in recovering from the bear market. It does not make sense to stop investing. Now is the best time to invest!
Stick to your plan and allocation
Many people try to change their asset allocation during a crisis. For instance, some people try to increase their bond allocation.
But this is not a good time to do so. There could be good reasons to change your asset allocation. But doing that because the stock market is going down is not a good idea.
You need to stick to your asset allocation. It was right when you decided on it. It is still good now! Staying the course is a vital part of any plan.
After the crash, if you felt you had too much stocks (or too much bonds), you can always change your asset allocation and rebalance. But do not do that during the crisis.
Also, if your plan includes rebalancing, you need to continue rebalancing even during the bear market. For instance, as stock fall, you may want to sell some bonds to purchase more stocks. Rebalancing will help you in the long-term.
Use extra cash (if any)
If you have some extra money available, it may be a good time to invest it.
You should not invest your emergency fund! This one needs to be kept ready. And you need to make sure that your emergency fund is full and adapted to the circumstances. Your emergency fund is not for investing!
If you are investing regularly, why would you have extra cash?
A lot of people are keeping extra cash when the markets are at very high valuations. This extra cash is sometimes called an opportunity fund. Once a bear market stats, it is a perfect time to invest that extra cash at a discount.
One thing you have to decide is: at which point will you invest? You need a strategy. You could use a simple threshold strategy:
- Invest 25% of your cash at -20%
- Invest 25% at -25%
- Invest 25% at -30%
- Invest 25% at -35%
Or you could follow an ETF, and each time its price goes down by one dollar, you buy 10K USD. There are many strategies like this. And you can even make your strategy part of your Investor Policy Statement.
Keep it simple
When the market is going down, there are a few investing techniques that you take advantage of. These are complicated and risky instruments, and I strongly encourage you not to use them!
If you are a passive investor, you should keep investing like you always did. There are no reasons to change just because you think you can make a quick buck.
Some people are trying to find stocks that will endure during a crisis. For instance, some companies are more vulnerable to a virus than others. But if you are passive investors, just stay the course and continue investing in your portfolio.
In a bear market, Inverse ETFs are doing very well. These ETFs are doing the inverse of an index. When the index goes down, the ETF goes up and vice-versa. But using this form of ETF is just market timing. When are you going to sell? When is the market going to reverse? You should avoid this!
Another thing you should avoid is short selling. It means you borrow shares, sell them immediately, and hope to repurchase them later cheaper before you return them. It is quite dangerous because if the stock market goes up, you can make a significant loss. Short selling is significantly riskier than merely investing in stocks.
Another thing you could do is invest on margin. Using margin means you borrow money to invest in stocks. By investing with other people’s money, you will increase your returns if all goes well. But if it does not go well, you will also multiply your losses. It is very dangerous. I would also strongly recommend that you avoid doing that during a bear market.
Another thing you should avoid as well is using options! There are many ways to use options to profit from a down market. But these are incredibly complicated instruments and extremely risky as well. Do not try these just because you read somewhere that they are a way to invest in the stock market.
During a bear market, you need to keep it simple! Just because the market is going does not mean you should change your investing techniques.
Conclusion
A bear market may be a scary thing. But if you do not panic and follow a few simple rules, you can get out of it stronger than you were!
The most important thing is not to panic. Do not sell your shares! Do not try to time the market. During the bear market, continue investing as usual. And use the extra cash you may have to reduce your average price.
Keep in mind that bear markets are normal. There have been many bear markets in the past, and there will be many in the future. We need to live (and invest) with them.
During any bear market, you should continue doing what you were doing before. Do not make any change in your investing strategy or your asset allocation. It is not a good time for this.
I hope you will trade safely during these troubled times and keep being healthy!
Once this bear market will be over, there are a few things we can do after a bear market.
A bear market does not mean we are in a recession. You can learn more by reading my article about recessions.
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Hi Mr thepoorswiss,
Thank you! I really appreciate your help :) would I dare to ‘annoy’ you with 2 other questions? :P eheheh
(1) Taxes we HAVE to pay:
With my new broker IB, I will start for the first time with a US fund (the famous VT!) When I opened the account, I filled directly with IB the W8Ben form.
This means that IB will pay me 85% of the dividends instead of 70%? Then in 2021 I will pay 100% of the dividends to the swiss IRS as income tax (but I can reedem later the 15% witheld tax)
Will this be the procedure with IB? it seems there is no double taxation with them…
(2) Taxes we can AVOID to pay (maybe):
With the change of broker comes the portefolio doubts :)
So, in Switzerland the capital gain is taxed as fortune (in our cases) but the dividends are taxed as income (much higher %!!). And if we buy shares of a firm that pays no dividends, like UBER, the capital gain is taxed as income (ouch!!).
Now the question. Say the capital gain of the firm was 10% in a year, we can sell 10% of our shares in December and pay 0% taxes as income. If the stock grew 20%, we sell 20% of the shares.
If we go a step further, we can buy an Accumulating ETF and at the end of the year sell the % of capital gain to avoid any income tax. Then we buy back on Jannuary :P and only the NetWorth is taxed as fortune.
Am I missing something, can we really avoid all income tax? I would love to hear your thoughts!
Cheers!!
Hi Alex,
1) It seems that you got it right. 15% will be withheld. The dividends are counted as income in Switzerland. And you can claim this 15 % as already paid.
2) Capital gains are not taxed. However, capital is taxed as fortune indeed. The part about UBER is not correct. If you buy shares of UBER and sell them with a profit, the capital gain is not taxed. There are exceptions (being a professional trader or having half of your income as capital gains).
I do not understand your strategy of selling. I do not think that is correct. If you buy an accumulating ETF, you will not avoid paying taxes on the dividends, in Switzerland.
I think you do not understand how capital gains are taxed (or what they are maybe). Capital gains are only realized when you sell something. If you have an ETF that appreciated by 50% and you sell it, you generate capital gains of 50% on the value of your shares. This should not be taxed in Switzerland. That is unless you are professional trader or if this capital gain represents more than half of your income.
Does that make sense?
Hi Mr thepoorswiss,
Thank you for your explanation, it makes very sense.
My accumulating etf example was very unfortunate because they also pay dividends, but if that etf is not part of the ICTAX system, you pay income tax on the capital gain, is this right?
This is not a strategy of mine, i read it online on another swiss post about choosing zero yield stocks to avoid paying taxes on dividends, but for that you need to sell shares equal of the % of growth. Maybe I got it wrong, ill read it again…
Thank again and cheers!
Hi Alex,
In theory, if the ETF is not part of ICTAX, you will indeed pay capital gains tax. However, there is a way to ask for an ETF to be added. I know people who have done that successfully.
You are right that choosing zero yields stocks as Berkshire Hataway will reduce your taxes and your fees with DEGIRO custody.
Hope that helps :)
Hi!
Great article! I learnt a lot.
I want to start investing and I have my IB account ready to buy VT. But I’m not sure how to proceed.
With the current market situation I thought to invest 10% of my current savings monthly, and after 10 months just invest an smaller amount from my monthly savings.
With that strategy I’m not sure if I should by the first 10% now or wait a couple months to start.
It’s a long term investment and I would start now but everyone I discuss it with says to wait.
If would be very helpful if I get your opinion :)
Thank you in advance!
Hi Lorenzo,
If you are ready to invest over 10 months, then I would simply start now. There is already about 30% discount from the highs. So this is a better time to start investing than two months ago.
However, it’s true that it may go lower. But how are you going to find out how much lower. In a couple of months, the stock market may be back to normal. But it may also be 50% lower than now, nobody knows. Given that, it makes sense to start now and in one month, invest the next part of your savings.
That’s what I would do.
Thanks for stopping by!
Thanks for your advice! And for you quick answer!
I think I would do that. But I was thinking to do it weekly (2.5%) instead of monthly (10%), to get advantage of the volatility. That’s a bit more commissions, but maybe make sense right now, isn’t it?
Thanks for your advice! And for you quick answer!
I think I would do that. But I was thinking to do it weekly (2.5%) instead of monthly (10%), to take advantage of the volatility. That’s a bit more commissions, but maybe make sense right now, isn’t it?
Hi Lorenzo,
I will throw my 2 cents into this discussion :P it worths what it worths eheh
It’s very hard to say, if you invest weekly and the market goes up, your average cost will be lower than investing monthly.
If you invest weekly and the market continues to go lower, your average cost will be higher than investing monthly.
I would choose to invest monthly, dont overcomplicate and in the longrun this decision wont matter much :)
Cheers!!
Hi Alex,
I agree with your two cents. Keeping it simple is a good strategy.
It’s impossible to find the most efficient strategy. Therefore, we should not try too hard :)
Thanks for sharing!
Thank you for your advice Alex!
cc The poor Swiss
I thought weekly because I would say there is more probability that the market keeps going down, or at least that is the most common opinion with the people I have talked and the article and news I have read.
But the end, the important thing is what you say: “long run this decision doesn’t matter”
Thank you guys for your tips!
Hi Lorenzo,
In some cases, you will get a better deal with weekly investing and in some cases better with monthly.
I think it can work as well if you do it weekly. But make sure you do not overcomplicate things. I prefer to keep it simple. I would do it monthly to keep it simple.
Good luck!
Hi Mr Thepoorswiss,
Very nice article, i liked it a lot. With all we can do but shouldn’t do! Inverse ETFs might seem a good idea, but if we have to sell in the next 6 months after opening the position we can have a surprise with the swiss IRS eheheh and put options are just too risky and don’t deserve a second thought (at least for me). Just continue to invest is the best strategy.
I wanted to thank you from replying to my questions regarding IB in your comparison article with Degiro. Already opened an IB account and so far so good !
Cheers!
Hi Alexa,
That’s a good point about having to sell early with Inverse ETFs. I actually did not think about that.
You are welcome :) I try to answer every question.
Good luck with your investing!
Thanks for the article, I’m in the position where I’m waiting for my next Salary for this month in order to invest again. I’m not too worried about the huge losses I’ve had so far. At this point, I give my thoughts to people surrounding me who are independent (not FI), this is a really rough hit.
No matter the situation panic doesn’t help.
Hi John,
Yes, people that are self-employed are in more trouble than we are.
I also plan to invest part of my bonus next month even though we plan on buying a house soon.
Panic never helps :)
Thanks for stopping by!
Great article, thanks! I see a lot of ‘bogleheads’ becoming day traders these days, they should take three or four steps back in my opinion.
PS: I think you have a typo and some date wrong in this sentence: “Before that, the previous stock market occurred during 2017 and 2019, caused by the subprime mortgage crisis. During this time, the S&P 500 lost about 50% of its value.”
Cheers!
Hi Lionel,
Yes, many people are changing their investing strategy to make some quick bucks :(
Hopefully, this article will prevent some people from doing the same mistake. There is nothing wrong in investing some extra money that was kept for the opportunity. But other than, investing should be business as usual.
Thanks for letting me know, I have fixed the dates :)
Good article. Reminds me that the most successful portfolio was the one which was untouched for decades…. :-)
Only one point. Why do we insist on adding profanity to everything these days? Does it make the request more important. I realise that I sound old as I say this but I think we have enough colourful language around us as is. PleaseStayHome is probably more persuasive than StaytheF**kHome.
Enjoy your posts. Keep them coming. And stay safe.
Hi WN,
That’s a very good way to put it: The most successful is the one that was not touched for decades!
That’s a good point. I honestly do not know. I guess there are so many things around that this is the only way for some people to distinguish themselves. In that case, I agree that there is no need for it. I have changed the link on my side. But the manifesto remains entirely valid :)
Thanks for stopping by!