In my last post, about asset allocation, I wrote about the effects the 2007 – 2009 bear market had on us. It had lasting effects on us personally, professionally and financially.
Dreams of financial independence were shattered or at least delayed. At the time, leaving the corporate world no longer seemed possible. A few tears were even shed in the Dividends household. Mostly by Mrs. DD. I’m only a cry baby when she doesn’t give me my way. Fortunately, I get my way most of the time. At least that’s what she tells me.
THE GOOD NEWS – WE SURVIVED THE LAST BEAR MARKET
Fast forward from 2009 to the present. We survived. Our finances recovered. We were both able to exit the corporate world a few years later. I am now a teacher and Mrs. DD is a librarian. I know pretty exciting stuff. That is if you like watching paint dry or grass grow. Well, maybe not so exciting, but it works for us.
HANGOVER PREVENTION 101
Now I’m the first to admit I like a few cocktails from time to time. “Whiskey, wine or beer will do, while you’re at it bartender I will have a vodka too” is one my favorite drinking slogans. When I was younger, the more the better. In my advancing years, I have found moderation to be my second best friend (right after Mrs. DD).
However, I always like the hangover prevention methods I read about. Drink plenty of water, don’t mix different types of alcohol, take two aspirin before you go to bed, get plenty of rest the night before imbibing, drink on a full stomach, etc. etc. Some of them actually work pretty well.
WHERE AM I GOING WITH THIS?
This isn’t a blog about drinking so where am I going here. I think surviving a hangover is like surviving a bear market after the bull market party is over. There are things you can do before the party ends to limit the after-effects of the beer. Sorry, I meant bear. Here are four investing principles to consider:
1) Asset Allocation
Your asset allocation will play a large role in determining your overall losses in the next bear market. Make sure you are comfortable with the risks you are taking.
Asset allocation plays a large role in investment risk. So a little moderation goes a long way, know your asset allocation and make sure it’s consistent with your risk tolerance.
2) Stay Diversified
The last bear market was partially brought on by the financial crisis. Some investments declined more than others. Banks, financial institutions, mortgage REITs just to name a few were absolutely crushed. I owned some, but they were part of diversified selection of stocks and bonds that limited the overall damage to our net worth.
I don’t know what will get hurt most in the next bear market, so I stay diversified and think you should consider the same. While mixing alcohol is a bad idea, mixing up your investments is a good one. Don’t put too much of your hard earned money into any single company or any group of companies in the same industry.
3) Review Your Holdings for Weakness Now
If some of your holdings aren’t meeting your expectations, find out why and consider selling them now while the market is up. Research why the company’s stock is not performing well. Is it just out of favor in this bull market? That can happen and may be okay. Investors might be shunning the company, not because of its fundamental earnings or prospects, but because it’s not the sexy high flying growth stock everyone is talking about.
On the other hand, has the company’s earnings stagnated, dividend growth slowed and a clear growth strategy not been communicated to investors? This is a bad sign. If a company can’t perform well financially in a growing economy, how will it do in the next recession? Probably not so well. If this is the case, sell it now and move your money elsewhere while stock prices are high. Make sure you have a well-rested portfolio by reviewing all your investments and removing the tired performers.
4) Have Some Cash On Hand
A little extra cash will help in two ways 1) Cash won’t decline in the next bear market, and 2) you can use it to buy when the market is down. Buying when the market is down (not selling) is a good way to improve your market returns over the long term.
I like a dollar cost averaging strategy. You can read more about that here: Should You Invest in the Stock Market Now?. Keep some aspirin handy and make sure to have a little extra cash to take advantage of opportunities.
HOW ABOUT YOU
I have no idea when the next bear market will occur, but it is good to be prepared. Do you have additional methods to limit bear market damages to your investments? Better yet, do you enjoy a “beverage” from time to time like me? Leave a comment, join the conversation and let us.
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Mike @ Balanced Dividends says
It’s odd how some hangover prevention and remedy methods work one time but not other times. I’ve only lived through one bear market as an “adult” so far, so I don’t know if my methods will work.
Related to the first post in this series and on your other questions:
-Agreed, no one knows when the next bear will come. I’m curious to see how I’ll react through it a second time now 10 years older.
– From a preparation perspective, we’ll continue to DCA but also look for bargain or buying opportunities to lump sum as well.
– As shared, I’ve recently shifted about 5-7% of our net worth from what I felt were over-valued equities in our portfolio to cash / short-term cash equivalents. Additionally, future 401k / retirement account contributions are going toward the same to build up an additional cushion as well as for buying opportunities.
– I’m typically a beer person, but I also enjoy wine and whiskey. It’s 5 o’clock somewhere.
Tom says
Hi Mike, Even though I’ve been through a couple bear markets, I’m curious how I will react to the next one too. It’s never easy. Short of going to all cash, sounds like you are doing the right things consistent with your risk tolerance. Tom
Mr Defined Sight says
Hi Tom! I like your message here, I try to employ some of the same strategies. I like having cash on hand even though some will say that it should be put to work at all times. Just makes me sleep better at night. Just like a good cocktail! I used to drink rum and coke, and then JD and coke. Now I usually will settle for a couple of beers on the weekend.
Oh and Mrs DS has a solution for you in regards to your Pinterest question. She’ll reply back after work. We were just having a little fun with that latest post, that picture wasn’t really us hahahaha. Take care my friend!
Tom says
Hi Mr. DS. Thanks for commenting. I like how a good cocktail can help you sleep at night too. Just like a little extra cash. Very good. I missed that one. No rush on the Pinterest question, but would be interested if Mrs. DS experienced the same problem and has a solution. Tom
SMM says
In terms of reviewing my holdings for weaknesses, I found I was under-diversified in international stocks. Therefore, I sold some stuff off and reallocated into a low-cost international index fund. I suppose it accomplished 2 and 3 both. 🙂
Tom says
Hi SMM, Sounds like a good strategy. I think having some non US international exposure is good thing for diversification. I get most of mine through funds and ETFs like you have done. Thanks for stopping by. Tom
Steve says
Excellent article Tom, I enjoyed both articles part one and two. Like yourself I have been investing since the early 90’s and have seen a few corrections. I am closer to retirement now but hope I am smart enough to stay invested and dollar cost average into any correction. Past performance is never guaranteed but I have made the majority of my gains by following this strategy. Your 4 part strategy should keep us in beer,wine, and cocktails.
Tom says
Thanks Steve. You got it buddy. We don’t want to miss our next drink because of a downturn in the stock market! Talk soon, Tom
Damn Millennial says
Hey Tom, good points. I think the big one for me will be having cash on hand. I 100% know that there will be multiple bear markets in my life I am realistic about it. Actually selfishly because I am early on in my journey I wish it would come sooner then later. I know that a large cash reserve helps me sleep at night and will keep me invested. As long as your allocation matches your personality type everyone can weather the storm.
Tom says
I’m with you Mr. DM. An ugly bear is rough, but I could go for a nice orderly pull back sooner rather than later to surface some better buying opportunities. Tom
GYM says
I love this post! Yes, we are all drunk right now and the hangover is coming anytime. Aspirin/Tylenol being analogous to cash is great. Good idea to have cash on hand especially with record highs. The ride will be over soon and everyone’s beer goggles will be removed and the party will be over.
Tom says
Knowing you like a good analogy GYM, I thought you would enjoy this post and I am glad you did. I try to keep my beer goggles tucked away and only wear them on special occasions. Otherwise every stock I look at looks good to me! Tom
Dividend Daze says
Are you sure you don’t want to keep writing about alcohol? Sounds like you have a knack for it. I really liked the slogan haha. I know my asset allocation is not as good as it can get, but that will smooth out with the more positions I add to my portfolio. Same with diversification event though it is pretty diverse right now.
A lot of people will flock to “safer” stocks in the bear markets like utilities and food since people use these regardless of market conditions. And keeping cash on hand to take advantage of big dips is key to making the best out of the situation. Granted your emergency fund is built up enough just in case.
And most importantly, like you mentioned, don’t sell. The strategy is hold for the long term. And if you bought quality dividend stocks they will keep paying and increasing even in the down times. Which means you will DRIP shares at a lower rate and make your portfolio that much stronger when the market rebounds.
Tom says
Hi Mr. Daze. Thanks for stopping by and commenting. You are right, us dividend investors usually have a pretty good allocation to utility and consumer staple stocks. They generally fair better as you say since people flock to them in tough markets. I also like your point about holding for the long term. As dividend investors, we have to hold to collect our cash. Another good reason for sitting tight when the going gets tough. Glad you liked my drinking slogan. I think I made it up, but who knows, I might have been drinking at the time. 🙂 Tom
Caroline says
Dollar cost averaging has been my best strategy for both my RRSP and RESP, the problem is that I am not that disciplined with my taxable investment account and I like playing the market a bit:( Good thing most of my investments are in my RRSP (and rental properties as #2) . I am planning to keep more cash so I can buy stocks when the market goes down. Another great post Tom.
Tom says
Thanks Caroline. Your rental properties are a nice diversify-er for the stock market. And it’s always okay to have a little lack of discipline in us even in the world of investing and personal finance! Tom
Mr. ATM says
Very nice post Tom. I especially enjoyed the drinking analogy, and your tips for overcoming a market hangover are right on the money.
One of my goals have been to have a portfolio that would have a calming effect on me when I look at it. Last thing I need is a stress from investments. If I needed stress, I would have kept my job.
I follow all of the suggestions you mentioned in this post and even a few strategies of my own to get to a portfolio that helps me sleep well at night.
Tom says
Hi Mr. ATM. I am with you sir. No need to have more stress than necessary. Our investments and the financial independence they create are supposed to provide security and peace of mind. And I am all for those things. Tom
Mr. ATM says
Hi Tom,
Speaking of stress, have you seen the FIFO provision in the new tax bill? This is going to be a nightmare for us (the individual investors), both in terms of higher taxes and having to manage/track the accounting for FIFO.
At first I thought, the FIFO rule would only apply to a single account, but it looks like it may be treated like the wash rule applying across all accounts.
Here is a discussion on it in Reddit:
https://www.reddit.com/r/financialindependence/comments/7hgrsb/new_tax_plan_may_force_fifo_first_in_first_out/
CNBC half-time also talked about it yesterday. But here is a good article on WSJ: https://www.wsj.com/articles/small-investors-face-steeper-tax-bill-under-senate-proposal-1512988201
What is your opinion on all this? This is stressing me out! 🙁 I can use some comforting words. Thanks buddy!
Tom says
Hi Mr. ATM,
I did read the WSJ article the other day. I am down on the tax act in general. I live in a high income tax state and a high property tax county. Those lost deductions will certainly raise my tax bill. I am happy Corporations will get a tax cut to allow them to be more competitive globally. I also think that will lead to better dividend increases over time. However, I’m not happy the corporate cut is coming at my expense. The FIFO rule is just another irritant to me. I think I can side step it by tax loss harvesting whenever I get a chance to build up an inventory of losses to use when I decide to trim winners. I much more often sell my losers than my winners which also can limit the effect of FIFO. I also tend to sell an entire position rather than parts of it. I guess I can deal with FIFO, but it is not ideal and will limit my flexibility. US taxes are just a zero sum game with the losers having to pay for those who benefit. And yet the tax act is going to still drive higher deficits which I think is irresponsible. I hope this answers your question, but not sure I am providing much comfort. Thank you for the links. I will check them out to see if I am missing anything. Tom
Mr. ATM says
Hi Tom,
Sorry to bother you again, but here is the final tax bill: http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf
Trying to review the section on Capital Gains Rates to see if anything changed for capital gains and dividends in the new bill.
After reading it, my understanding is that Cap Gains + Qual Dividends will not be taxed under the 15% income break-point (bracket) which is now the 12% bracket $77,200 for joint filers.
If you have time, check out the sec:
“Maximum rates on capital gains and qualified dividends”
Let me know if your understanding is different. BTW, I didn’t see the FIFO on stock investment gains, so I think it is still out.
Thanks
Tom says
Believe it or not Mr. ATM, I am a CPA, but taxes have never been my area of expertise. Given that, my take is nothing relative to Cap Gains and Qual Div’s is changing. The break points appear to be the same as the old tax law, but will be indexed for inflation going forward. To conclude, I’m saying I read it the same as you. Tom
Mr ATM says
Thanks Tom.
I’m in a similar situation as you on state and property taxes. I don’t think doubling of standard deduction will completely offset loss of state and property tax deductions for me. Sucks!
You are right, fifo can be dealt with by using certain sell strategies, though l still don’t like to be forced to sell stocks just because it may generate more taxes for the govt.
You should write about your fifo strategies 🙂
Thanks again
Mr ATM says
Tom,
Just saw on Twitter,FIFO has been removed from the tax bill 🙂
I think all the complaining l did on Twitter worked. 😉 Now we need them to add back state and property tax deductions.
Tom says
Thanks for the new info and your lobbying efforts Mr. ATM!. We could only be so lucky on the state and local tax side. I doubt that’s going to change, but stranger things have happened. Tom
fin$avvy panda @ finsavvypanda.com says
Hi Tom! This was a great post!
Aside from having an emergency fund, I am generally the type who likes to throw everything into the markets each time my paycheck comes in. I go all out and put most of my money into stocks and ETFs because I couldn’t stand my money not working for me.
And to be honest, I think it’s because I haven’t experienced any pain from a bear market (yet) since I only started investing in 2011. But I told myself that it’s time to change my expectations. Maybe a bear is coming soon? 🤷♀️
With that said, I’ve been thinking about saving more cash than I normally would because it may come in handy. For example, I like Warren Buffett’s analogy of how cash can be viewed as a call option with no expiration date.
Like what you said, should markets fall, we will have that option to buy almost everything on sale lol. It will be a great opportunity to yield better returns.
But even so, I’ll still be doing a bare minimum of DCA on a monthly basis just so I don’t feel like I’m timing the markets 100%.
Tom says
Hello Ms. Panda. Welcome to Dividends Diversify and thanks for stopping by. I like that you brought up Mr. Buffett. In the depths of the last crash, he had the cash and was investing/providing it to certain companies to keep them from going bankrupt. Of course he only provided that funding at terms very favorable to Berkshire. Having that cash in such a time of stress was a huge advantage for him. Emulating Buffett is most always a good strategy. Tom
timeinthemarket says
Bear markets happen and while it’s impossible to predict when the next one will be, history tells us that we’re probably not that far away from one. I think it’s important to revisit asset allocations on a yearly basis and make sure you’re still good with where you’re positioned and can stomach a potential 30-50% cut if you’re heavily invested in stocks.
The worst thing you can do is be forced to sell when things are low when it comes to long term returns.
Tom says
Totally agree Time. With the markets continuing to hit new highs (which is great), asset allocation targets and re-balancing to get back to them are really important. Tom
Michael | Your Money Geek says
Hello Tom
I think your analogy is relatable on many levels. The markets also remind of 99 as well, and everyone thought the party wouldn’t stop then either. Given the market highs and valuations, I think a few strategies are worth implementing.
1. Consider taking a portion of your portfolio and consider moving it to a fixed indexed annuity or MEC (I know many annuities stink, some are good) Many contracts today are capable of decent returns will maintaining safety. Once the market corrects, DCA back into equities.
2. Consider non-correlated assets such as REITs and MLPs. Many of these pay decent dividends, and many of them will benefit from the tax bill.
3. Consider a more value-focused approached as opposed to passively indexing. Indexing is cheap and works great when the whole market is increasing, however as the markets top out it becomes more prudent to look at valuations.
4. Hedge risk with options and sell orders. Options can be a very useful way to enhance the returns of a portfolio and minimize risk, if used correctly.
I’m going to share this on social media, thank you!
Tom says
Hi Michael, Welcome to Dividends Diversify. Thank you for your thoughts and comments. You bring up a lot of good points and options to consider. I really appreciate you sharing the article on social. Visit again soon. Tom