Mind on Money: Reaction to bear market reveals risk tolerance

Mind on Money: Reaction to bear market reveals risk tolerance

One of my favorite Warren Buffet quotes is, “the light on Wall Street can at any time go from green to red without pausing at yellow.”

With this in mind, I always enjoy hearing the end of day “market minute” reports on any given media outlet which attempts to link the day’s stock market results to some logical explanation. As someone who used to pen the market minute reports for Lakeshore Public Radio, I can confidently say, the reasoning provided is 5% logical and 95% arbitrary. The hard truth is, the vast majority of time, markets go up and down on a daily basis simply because they go up or down. There is no short-term logic or reason, and the confluence of variables determining short term direction are simply too random and complex to discern.

In July, while we were awaiting pronouncement of a recession, while inflation numbers were still rising and while the Federal Reserve was reiterating its intention to raise interest rates and tighten financial conditions, the stock market managed to move higher by about 10%, depending on what indicator is being followed. 

This move to the upside may have been because second quarter corporate profits for the most part came in better than expected; it may have been because strategists were perceiving a slowdown in the economy which could lead to lower interest rates in the future, or maybe even because employment statistics continued to be solid. Candidly, no one really knows why the rally occurred, but it did and in doing so opened a window.

We have not experienced a prolonged bear market in stocks in the United States for a long time. Sure, we had some stressful periods in 2015 and 2018, and the COVID crash in March of 2020 was particularly violent, but these market events were short lived, and let’s be honest, in the case of March 2020, many of us were distracted with other things. Of course, for many of us more “seasoned” investors, the memory of 2008 and 2009 still rings strong in our heads, but this brutal 50% plus market crushing disaster is now 14 years in the rear-view mirror. A whole new generation of investors has emerged and hit their stride since this time, which is now fading into the realm of history.

The 2021 to 2022 bear market, however, can now be acknowledged as one of the more material negative market events in decades. So, congratulations on living during “interesting times,” but at this point I think we would all prefer a little boring. I know I would.

The question that is particularly timely right now is: How did you personally handle these “interesting times”? Were you stressed out? Did you lose sleep? Did you sell stocks in May or June?

Or on the other side, did you buy low? Did you rebalance toward stocks in your 401(k)? Did you get excited by the opportunity offered by the bear?

Finally, did you even notice? Did you forget to log in to your 401(k) to see what was happening? Did you leave your June investment statement laying on the kitchen counter unopened, did you shred it before you even looked?

How you reacted to the very real bear market of the past few months is extremely important right now, because in many ways your response helps reveal your true tolerance for investment-related risk. As someone who has helped literally thousands of investors explore their feelings and thought processes on financial risk, I can say without hesitation that an investor’s personal investing culture is most heavily influenced at market peaks and troughs, but to me only what is revealed during the latter contains any useful behavioral insight.

The reason why it’s important at this particular point in time to think about how you reacted in May and June is markets are now neither at a peak or a trough. Markets have rapidly recouped a nice portion of the losses experienced this year. No, most of us haven’t recouped our year-end values, but using an all-time high value in market as your new benchmark is about as illogical as panic selling a low.

Instead, the July market rally opens a window for thoughtful contemplation about how we managed at the recent market bottom and whether or not we want to endure this type of stress going forward. There is not a right or wrong answer to this question, there is only your personal answer, and the July rally affords us the right opportunity to ask it.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Precious metal investing involves greater fluctuation and potential for losses. Past performance is not a guarantee of future results. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.