Does Experience Matter During a Bear Market?

One of the best predictors of future behavior as an investor is past behavior.

If you had a steady hand and held on through the 1987 crash or 2000-2002 bear market or 2007-2009 Great Financial Crisis, odds are you can hang on during the current bear market.

But no rules of thumb are guaranteed.

James Stewart wrote an excellent piece in the New York Times last week discussing how 40 years of sound investing habits went away in 40 days during the pandemic:

I’m paralyzed.

I’ve owned stocks for nearly 40 years. I’ve lived through, survived and even prospered through four crashes.

So I should be prepared. Yet, looking back at the last few weeks, I recognize that I’ve violated most of my time-tested rules. Whipsawed between optimism and despair as the bad news mounted and my daily life was upended, I’ve let emotions influence my decisions. I’m doing it again this morning.

Michael and I discussed experience versus expertise on a recent podcast:

Investor behavior can change over time for a number of reasons. Your ability to take risk may be greater as you build wealth but your need to take risk may decrease. Circumstances can change how you view your investments.

While you may not have experience as a youngster when it comes to market crashes, you also have little in the way of financial assets. Your human capital is your biggest asset so you have plenty of time to be patient.

Patience can wear thin once you’ve amassed more financial assets. Stewert mentioned he has been investing for almost 40 years. That’s a long time to build up your portfolio and the fact that he started in the early-1980s means he (hopefully) saw his wealth compound at a decent clip in that time.

U.S. stocks are up more than 5300% (11% per year) since 1982, which is when Stewart says he bought his first equity mutual fund.

Those in or approaching retirement age who have built up sizable portfolios have likely experienced relatively large dollar declines in their holdings. This can increase stress levels when stocks are going down.

A 60/40 portfolio was down roughly 12% in the first quarter. That’s not the end of the world but it’s a loss of $120,000 on a $1 million portfolio.

Financial mistakes can always come back to haunt you but they can be especially damaging to older investors.

I wrote the following in Don’t Fall For It:

You only have to invest all your money in something you don’t understand ONCE to see it all vanish. You only have to turn your life savings over to a charlatan or huckster ONCE to see them bleed you dry. You only have to become overconfident in your investment skills ONCE to see a concentrated position completely go against you. You only have to place your trust in the wrong individual or organization ONCE to ruin your financial future.

But the flip side of this is true as well.

You only have to learn how to manage your money ONCE to preserve your hard-earned savings. You only have to come up with a solid business idea ONCE to create a powerful stream of income. You only have to get lucky ONCE to see your career, earnings, or business opportunities take off. You only have to get your financial affairs in order ONCE to begin seeing meaningful results.

I was referring to financial fraud here but this applies to investment mistakes as well. It only takes one huge blunder during a bear market to set you back years in terms of your past savings or future spending.

If you’ve managed to stay the course during past bear markets you may find yourself not worrying about the current iteration. That’s a good thing if you’re able to stick with your plan but not if it allows you to become complacent or overconfident.

This time is different but so is every other time. Experience is only useful when it teaches investors the role of self-awareness in the decision-making process.

Avoiding mistakes as your portfolio grows is typically more important than your investment prowess. This is even more true during bear markets.

Further Reading:
Experience is Overrated

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