Ten rules for not being dumb when the market goes down.

By Abi Tyas Tunggal 5 October 2018 4 min read


  • Learn from history!
  • Re-visit your investing thesis and if it holds true, don't panic.
  • It's time in the market, not timing the market.

The S&P 500 Index, which mimics the 500 largest shares in the US stock market has enjoyed an almost 300% run since the depths of the GFC in 2008.

A lot of people are calling this eight year run the second longest bull market ever. If this bull market were a kid, it’d be bugging its parents for the new iPhone X.

Yes, there have been dips, but if you would have invested your money for the last eight years, it’s fairly certain you would have seen your portfolio go up.

Almost 300%. That’s amazing.

But here’s the catch. That’s history. And if history tells us anything, it’s that bull markets don’t last forever. What follows is the bear market. A bear market is a market of extended periods of losses.

We can’t predict when a downturn will happen, no one can, or how long it will last, but like everyone else – we do agree that it’ll probably happen at some point.

So it’s probably coming. The important thing to think about is what will you do when it comes? Sell everything and move everything to cash? Probably not.

History is a great teacher and it tells us that if you panic during a bear market, you’re losing the opportunity of a lifetime.

Luckily for you, the right way is far easier. You do nothing.

1. Don’t panic. Repeat. Do not panic.

Whenever a bear market rolls around, we inevitably feel the natural response of fear. All of our gains are gone. Savings diminished, the world is ending. Sell. Sell. Sell. This is a great attitude to have if you want to make sure that your losses stay losses.

The old adage of “you only lose money if you sell”, is both right and wrong – like most cliches.

We believe that time in the market, not timing the market, gives a greater opportunity for good long-term investment returns. If you sell everything when the market drops by 2% in a day, then buy back a month later when things are looking better, all you’ve done is lock in a 2% loss.

You’d probably be better if you just forgot your password…

2. Remember what you’re investing for.

If you’re investing via your superannuation, but you don’t plan on retiring for decades, stop looking at the short term. What happens now probably won’t matter to you.

It’s about what happens over the long-term that matters. And the long-term trend for almost all markets since forever has been up.

The markets roughly reflect human progress, so if you believe the markets won’t improve over the long-term you’ve got bigger problems than just bad portfolio returns.

3. Bears don’t run as far as bulls.

According to Forbes, the average duration of a bear market since the 1930s has been 18 months, with an average loss in value of around 40 per cent. Bull markets on the other hand have averaged about 96 months each.

4. It’s your time in the market, not timing the market.

We all know that the goal of investing is to buy low and sell high. So it makes sense to wait until the market tanks to buy, and after that downturn happens you snap up bargains. The problem is no one can perfectly predict when the market will tank.

Even Warren Buffett says we continue to make more money when snoring than when active and the only value of stock forecasters is to make fortune-tellers look good.

Mr Buffett’s favourite period to hold stocks is forever.

5. Find an investment vehicle that ticks along in the background so you don’t have to think about it.

This is one of the best ways to take the emotion out of investing. Once it’s automated, the decision-making is out of your hands. If you’re in Australia, you’re lucky. You’re already investing 9.5% of your salary into your Super.

6. If you’re new to investing, give it time.

We’ve all seen the movies where a genius makes $1 million in five minutes by shorting a particular stock for a specific period of time. Sadly, for most of us, that won’t happen.

Here’s what you should know about investing: It’s an emotional game, when the markets go down, a lot of people tend to freak out.

So if you’re a new investor, you can take some of the decision-making away from yourself by following the above action point. If you keep making regular deposits, regardless of what the market is doing, it’s a great way to dollar-cost average into the market.

7. Sometimes doing nothing is better than doing something.


8. Average into the market with dollar-cost averaging.

An important thing to understand is that the economy will have negative years, it’s part of the business cycle. If you’re a long-term investor, one option is to average into the market by dollar-cost averaging.

This means you purchase regardless of the price, and you end up buying when the price is low and when the price is high. Over the long run, your cost will be the average of the highs and the lows.

9. Look for value stocks.

Bear markets can provide great investment opportunities. As Warren Buffett has said time and time again:

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."

10. Understand your risk tolerance.

Losses are a part of investing, again, to borrow from Mr Buffett:

You shouldn't own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.

And some food for thought…

Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do. – Warren Buffett

Ten rules for not being dumb when the market goes down.