Applying the 8 timeless principles in a bear market

A time for cool heads

It seems that many folks are increasingly hanging their hopes on daily market gyrations, which of course is utter madness writ large!

Let’s take a chill pill, and instead look to place and address current events according to our 8 timeless principles of investing.

Today we aim to show you how valuable they can be as core principles of any investment plan – especially during times of market turmoil to allow you to keep a cool head when others are apparently losing their’s.

You can also follow the links for more considered thoughts on each key principle when others (with the wrong model) have their emotions screaming at them to do something.

First, let’s look at the 4 thought principles:

1. Systematic investing

A swathe of folks have contacted us asking if it’s time to pile back in with abandon since markets have plunged.

The truth is you need consider your own situation and plan.

But for our own portfolios the answer is a resounding…no!


Because even after a 30% fall, the market is still expensive.

The US CAPE ratio is approximately 24 (and has been fast moving downwards from a high of above 33), and so while a 30% decline in Australia may feel like a lot if you’re fully invested, you need to put in context and realise that the market probably has further to fall.

Stick to your system, because this is how you beat the averages.

Don’t be tempted to break out of your written plan because these will be emotional decisions not using cool, calm logic, and patience.

And, furthermore, they will simply increase your probability of losing.

2. Personality

This is a tough one because your emotional brain will be pressing hard against your logical brain to do something. Anything!

‘Buy, sell, whatever…just DO something!’ is a common thought process.

Remember your own personality can prove to be your worst enemy here, and it’s all the more reason for you to stick to your investment plan.

Our Investment Maps for your specific personality type are designed exactly for these periods where your feelings rather than your logic are trying to seize control.

You can always email us for a free Enneagram Assessment and investment map for your personality type.

3. Market cycles/mean reversion

Needless to say, we’ve been in the late part of the market cycle for a while hence why markets have been so expensive, and they have now been trending quickly downwards.

Again, if you ignore market cycles you will lose, or at best receive average returns over the full market cycle.

Yes, you might feel like you are missing out at various points in time, but history is an excellent teacher (and also a brutal punisher if you ignore her lessons).  

3. Risk hierarchy

Risks have been very elevated for some time and it’s why we’ve had very little exposure to global markets, even though some markets such as Russia, Turkey, and Poland are relatively cheap (while the UK is now heading in that direction).

The number one rule ‘don’t lose money’ is so often forgotten when market sentiment is bullish.

Prudent and experienced investors know that risks are always higher after a strong 10-year period.

That’s why most decades show that a good 10 years is followed by a not-so-good 10 years if you don’t exhibit patience, sell at the highs, and feed back in at the lows.

With the 4 thought principles now covered off, let’s look at the 4 action principles:

5. Asset allocation

This is the time to have low exposure to stocks given the overall valuations levels.

We’re heavily in cash and in no rush to deploy it when markets are still expensive.

Might we miss out?

Sure, maybe we ‘miss out’ on the odd bear market rally.

But remember years of apparently great returns in Aussie stocks have already been wiped out in only 4 weeks, with the index falling all the way back to October 2009 levels in seemingly no time.

The bear market could yet run for months (or even much longer).

In fact we now, like Buffett, are sitting on piles of cash to deploy when and how we choose.

We can tell you it feels much better than simply hoping for markets to stop falling.

6. Buy low, sell high

A sudden 30% plus drop may feel like it must surely be a good time to buy.

In all likelihood, buying now may be early given that the CAPE ratio is still high.

Now if you look at individual stocks there may well be some that are cheap, such as in the oil sector.

But remember what Howard Marks said: buying a cheap stock in an expensive market may be a little hubristic, and although you may not realise it your initial price can fall a lot more.

7. Diversification

We always stress that diversification is useful, but it’s ineffective unless there are uncorrelated assets in the portfolio.

As as we also show, when all hell breaks loose stocks can ‘correlate to one’ and diversification within markets will not save you.

Markets have never been more correlated than they are today, and so losses will be widespread, even where and when they don’t appear to be justified.

Remember, cheap stocks and cheap markets can always get cheaper.

8. The magic of rebalancing

The timeless magic of rebalancing is what has repeatedly saved us from large losses.

Rebalancing means taking profits off the table at the highs and building cash piles for later use – to feed back in at the lows – not simply leaving funds fully invested to be swept away by large market declines.

We never really know exactly when we will deploy the cash, but we know for certain that there will always come another great time to buy as history and market cycles do repeat.

Holding cash can sometimes be painful, but it’s not nearly as bad as watching your portfolio in meltdown (leaving you with little cash to deploy when prices are at rock bottom and everything is on sale, just when markets are set to recover).

Take money off at the highs, and feed it back in at the lows.

Bringing it all together

So there you have it.

This post explains why our 8 timeless principles of of investing are an excellent and proven way of delivering solid investment returns throughout the whole market cycle, and not just when everything is doing well.

Stick with considered ‘System 2’ type thinking, and through the cycle you will comfortably outperform the averages, including market speculators, unthinking investors, and emotional investors.

To find out more about our coaching programs see here.

Published by petewargent

CEO Next Level Wealth, & AllenWargent Property Buyers, with offices in Sydney, Brisbane, & London. Leading Australian market analyst, & 6-time published finance author. For more see: Qualifications including: B.A. (Hons.) Industrial History, Chartered Accountant (FCA), Diploma Financial Services (Financial Planning), Chartered Secretary, Advanced Diploma Applied Corporate Governance.

%d bloggers like this: