There is an old story about two campers who are suddenly approached by a bear in the woods. Camper 1 is frantic and panicking. “What are we going to do?” he exclaimed. “That bear is going to devour us! We’ll never be able to outrun a bear!” Meanwhile, Camper 2 is stretching and tying his shoes tightly. “I don’t have to outrun that bear,” Camper 2 said, “I just have to outrun you!”
The moral of the story is this: Bear Attack Survival Tip #1: Don’t panic! Panicking will generally result in poor decisions that end up being more harmful than helpful.
Investors are not unlike our friends the campers. Imagine that these campers began camping in this particular spot in 2009. They were very apprehensive, as there was a vicious mauling at the campsite the previous year, but they decided to camp here anyway as it was a particularly beautiful spot. The trip in 2009 was spectacular and the campers decided to make the trip an annual event. They knew that bears were still a risk to this particular area, but decided to take the chance anyway. The campers remember: Bear Attack Survival Tip #2: Bears don’t stick around forever.
As time went on, the campers enjoyed their annual trip, and the memory of the vicious bear attack from years ago began to fade. Even though the campers knew bears inhabited this area, they hadn’t seen any in a long time. With every year that passed, the bears seemed like less of a threat. In turn, the campers grew gradually less vigilant.
Bear Attack Survival Tip#3: Know the risks of camping in bear country.
As of this writing, 10/14/2022, the stock market as measured by the S&P 500 has declined 23.9% for the year. Concerns about inflation and impending economic recession are credited for fueling this decline. As far as our campers are concerned, this is the equivalent to bears being back in the area. For investors, a market down 23.9% for the year can be good or bad depending on the situation of the investor.
An investor in the accumulation stage — a young, working investor — actually benefits from a down market. An accumulation investor is in the process of building their portfolio by putting new money into the market and buying stocks while they are at (relatively) low prices. An accumulation investor is investing for the long term and has plenty of time for the market to grow, creating gains on stocks bought at low prices.
An investor in the distribution stage—an older, retired investor that is making withdrawals from their portfolio—can suffer in a bear market. The core reason for this is time horizon. An older investor doesn’t have the same amount of time as a young investor for the market to rebound from declines. Worse than that, when a retired investor makes withdrawals from their portfolio, they will generally need to sell investments to generate the cash for the withdrawal they need to take the pay their expenses. When an investor is forced to sell investments in a down market, they need to sell more shares of that investment than they otherwise would to generate the same amount of cash. This means that from now on, that investor has fewer shares working in their portfolio. This brings me to…
Bear Attack Survival Tip#4: Secure your food so you don’t starve.
When camping in bear country, you need to make sure your food and other provisions are locked up and safe from scavenging bears. Some campers use a “bear-hang” which is done by tying food in bags up in a tree, but far enough from the trunk so the bear can’t climb the tree to retrieve it. Other techniques include using lock boxes.
The investment equivalent of securing your food is keeping some of your portfolio in cash—at least enough to handle short-term withdrawal needs. This could equate to 1 to 3 years of withdrawals if the investor is making regular withdrawals. The advantage of using this method is to avoid the need to sell in down markets. The investor can instead sell investments in the portfolio at high, attractive prices, and ride out down markets by taking withdrawals from the cash when necessary.
*Ted Schumann, II, MBA, MSF, CFP®, AIF® knows absolutely nothing about camping or bears of any genus, nor surviving actual attacks by these animals. He is, however, a seasoned investment advisor and managing partner of DBS Investment Advisers, LLC, a registered investment advisory firm that manages investments for dentists across the state of Michigan.