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Am I emotionally prepared for a bear market?

September 12, 2017

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I’ve done most of my investing from 2006 until today, and consider myself a buy-and-hold investor who is appropriately invested in the right risk pool for my age. Looking at the S&P 500 yearly returns (source) since I started investing, I can see why I’ve had so few struggles being buy-and-hold investor.

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Look at that 2008!  Yet, at the beginning of 2008, my net worth was less than $25k, and I had less than $30k invested in my retirement accounts in the market! That -37% felt terrible and scary at the time – but my net worth still increased a bit in 2008 since it was driven mostly by what I could save out of my salary.

If the stock market were to drop -37% in 2018, our net worth would take a big hit.  There is no way we’d have a yearly increase.  We’re not fully invested in the market, so we wouldn’t drop 37%, but we’d drop a lot.  In the case of a Great Recession like situation, our home value probably would also drop simultaneously.  It is less and less likely it will drop below the tax-assessed value (since in California these are not really related to the market value) – but not impossible.

While 2018 may not be the year, it is certain that there will be a market downturn in my adult life that will affect my finances much more drastically than the 2008 crash. Mentally thinking through how that will look and not getting too attached to overheated stock returns gives me a more realistic view of where we are at financially.

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10 Comments leave one →
  1. September 12, 2017 8:32 am

    Started working and investing in 2012, so I have yet to experience a real bear market. I’d rather weather one sooner than later. I have a strong sense of loss aversion, so I am hoping by having well-diversified holdings, I can mitigate the volatility enough not to actively freak out and make bad, impromptu, and emotional trades.

  2. September 12, 2017 9:23 am

    I wonder about this too. Despite not working right now, my 401(k) has gone up in each of the eight months so far this year. That’s never happened before even when I was adding to it regularly! It’s now up more than $18,000 for the year which is an exciting milestone 🙂 But holy crap if the stock market went down by 37%, even given that I have a decent amount of bonds and cash, my net worth would see a six figure drop. That’s ignoring my husband’s net worth which would also see a six figure drop… This is all part of why I’ve been practicing checking my investments far less often. How does your husband feel about the stock market’s possible swings?

    • September 12, 2017 9:52 am

      Good question. He doesn’t check the investments much, but he does like to see our monthly net worth updates. Part of the point of looking at this was to share with him how the numbers in the NW are nice, but not “real” or something we can count on keeping. We shouldn’t expect the same trajectory over the long haul (or even over the near term).

      Also for myself, for the same reason. I mean, I know we have had it good, but it hadn’t sunk in just HOW good the stock market has been throughout my investing career. Just punching in a -30% on our investment accounts to get a feel for the number was a little scary!

      How about your husband?

      • September 12, 2017 10:00 am

        He doesn’t really check ever. Except when I suggest he does. We are trying to do a combined net worth update monthly now. I told him that it would be a six figure net worth drop each and his response was only “bananas”.

  3. September 13, 2017 7:11 am

    I sure wish I knew the year! Because I know I’m way over-saving in cash right now… but at the same time, maybe I’m not.

    If housing prices in the bay area dropped in half and the stock market didn’t, we could afford to buy (in a good school district) out there with only DH having a job even with the potential for short-term unemployment.

    We’ve invested as much as we can in our house (by paying off the mortgage) and that’s going to vary differently than the S&P 500 because it’s a local market and we’re living in an established area. But that’s not even a downpayment for a bay area house, much less the 40% payment we’d feel more comfortable if we had. And, of course, we’re not sure that we’d ever actually want to move depending on how my job situation goes. Just that if we were to move, that’s where we’d want/need to go.

    • September 13, 2017 9:10 am

      In my head, I hold a 30% drop as the most likely potential max for real estate in the bay area, because is in line with what happened in ’08. But before that, a ~30% drop was unheard of, so anything is possible. This level of housing seems unsustainable, so I at least expect the growth to slow down. And I suppose if i dig further, some areas likely had larger drops. A 50% drop from today would destroy basically all of our equity, which would feel terrible but wouldn’t have a real impact until/unless we wanted to move. A 50% drop from our purchase price would put us upside down pretty significantly.

      I sometimes think about it in the opposite way and think about how we might have the “what to do with all this extra money?!” sort of “problems” if we only moved somewhere with less crazy housing costs. Yet there are only a few places where we both could have salaries that put us in that bucket, and T is not really interested in moving, and we do like it here.

      You could “invest” more in your house by making upgrades (bathroom/kitchen), but I am skeptical this really offers any return for your money if you aren’t selling immediately after doing a bunch of renovations.

      • September 13, 2017 9:19 am

        Like you say, I’m pretty sure renovations won’t offer us much return given that by the time we move fads will have changed. Though we will have to put in nicer countertops before we put the house on the market because we live in a mcmansion neighborhood where people don’t even have Corian. (Though, like us, potential buyers may just think to themselves, this is an easy and cheap fix.)

  4. September 18, 2017 2:33 pm

    I started investing in 2007-08 so this bull market feels horribly exuberant. At the same time, even knowing that a bear market is certainly coming, I know that weathering that is ALSO going to send me off balance. I keep reminding myself that it’ll be better for us to stay cash heavy in anticipation of that. I may have to game out the numbers in anticipation of a 30-40% drop just to make sure that I know what that will look like and emotionally prepare myself.

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