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Some observations from 5 severe bear markets

Wealth of Common Sense summarized some good observations on Servo Wealth Management data on  5 bear markets since 1920s.

What I find more interesting is reinforcing the point that, you can pull money out 100% from a bear, but that doesn’t kill investors return since most people won’t know where it ends. The issue is that most don’t get back in FAST ENOUGH. And they missed out on a large part of the recovery.

The general idea is that these events will come, and psychologically you can talk until the cow comes home how to prepare for it, and another to see your money decimated. Or how you are so strong in a bull market, that your skillset translates to a bear.

Managing the psychological part is important. If you are not ready to loss psychological capital, don’t have a 100% stock allocation.

Have a fundamentally sound plan. Understand what matters the most amongst all the noise.

A few observations on Nelson’s data:

  • You don’t need to get fancy with black swan disaster hedges. High quality intermediate-term bonds have been your best option for preserving capital during an economic disaster. They do their job as the portfolio anchor during periods of stress to give investors dry powder for rebalancing purposes to buy stocks on sale or for spending purposes so stocks don’t get sold after a crash has occurred.
  • Stocks can fall far and fast but also tend to recover very quickly. That’s why bailing out of stocks after they crash just compounds your problems if you held them through the crash in the first place.
  • Balance is the key to surviving these periodic crashes. The Balanced Asset Class Index which included large caps, small caps, value stocks and bonds fared much better than the all-stock options and outperformed the other options over the full cycle 4 out of 5 times.
  • Value and small cap stocks are great diversifiers and return enhancers as you can see from the All Stock Asset Class, but be prepared for large losses as well.

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