What Should be done During this Bear Market if Your Goal is to Beat the Market over the Long Run?
Are you looking for some special steps during this bear market to achieve your goal of beating the market over the long run? Well, we are sure; this may not be your financial goal. Many years ago, you may have decided to bank upon index funds. But we are sure that many of you still want to do better than what you are doing today. If you are in the same boat, this column is the right spot for you.
The best way to achieve your goal is to follow thick and thin advice of your financial adviser—and by “thin,” we are talking about the bear markets-the one that we see from the last five weeks. We understand that it is easier for people to follow advisers when the market is going well, but it is difficult when the markets are unpredictable. Honestly, that is the time when most advisers show up their true colors over buying and holding—their alpha. Investors should take away their bear market alpha, but this time, they are running out of their alpha.
This doesn’t mean that advisers don’t face the loss of money during bear markets. Most, but not all of them do face a shortage. But most of them lose less than the stock market itself. And that strategy of smart advisers becomes a crucial factor in their beating the bear market over the long run. The important lesson that can be learned from this is to focus on relative returns mean losses lesser than the market averages rather than total losses.
The inference from the past is that now is the poor time for all investors and financial advisors to give any advice or strategy.
According to Kara Jones, One way of proving this line is to compare the percentage of advisers who lead buy-and-hold in bull markets when compared to the bear markets. Below is the chart that summarizes the data from one of the renowned investment newsletters that started in the 1980s.
The percentage of monitored investment newsletters beating a buy-and-hold was more than 50% in each of the bear markets. The average of all five of these bear markets is 65%, or about 2/3. This is far better than the percentage of investment beating a buy-and-hold during bull markets, which is below 30%.
According to a recent analysis done by Style Analytics, a similar conclusion in an analysis of equity mutual funds was observed. Just like in the case of the investment newsletters, it was found that a higher percentage of investment beat a buy and hold during bear markets than in bull markets. Surprisingly, additional information was also fascinating. It was reported that as investors focused on mutual funds setting better and better records, they started receiving an increasing percentage of their long-term market-beating return from the bear markets.
What can be assumed from these results? We can’t say that managers are smart or shrewd during bear markets and behave opposite during bull markets. Let’s clear this with an example:
Some parts of this question will be answered mathematically. When a manager has cash in their portfolio, they use the money as a drag when the market is up, and the same money is a good source of alpha when the market is low. To make it simple, we can say that the bigger the loss during a bear market, the manager expects to make more significant gains during bull markets to overcome his or her loss. But that strategy comes with tons of risk, and from the track record of newsletters, rarely any riskiest newsletters have been able to overcome the losses.
Another part of this question will be answered psychologically: Only a few investors have patience and discipline to follow the same strategy throughout a bear market—leaving a positive point for those who have these qualities.
To make it clear that a bear market will not energize the long-term performance of a short-tempered adviser. Patience and discipline will not help you when you are taking advice from a wrong adviser. My suggestion behind this argument is to follow an adviser who is smart, right, and a good one to manage your financial situation. And we know that there is no sure shot way of knowing that with certainty.
But I am 100% sure that it is an unwise decision to get rid of your financial adviser when you see losses during a bear market.
No one advised you to stick to your guns when the market is low, especially when it falls as quickly as it did in the last five weeks. But your decision will decide whether you will be able to beat the bear market over the long run or not.
