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Opinion: How to stick to your money when stocks are falling

How you navigate the bear market for stocks makes the biggest difference to your long-term return on investment.

It’s important to remember this at all times, especially if the stock market is plummeting. No one knows if the weakness of the US market is the beginning of a bear market, but we know it will happen sooner or later. So now is a good time to choose a strategy that allows you to live through that bear market.

It depends heavily on doing this correctly. Indeed, Boston-based GMO Jeremy Grantham said the next bear market was “It is very likely to be the most important event in your investment life.

Therefore, we can see that the fall in the market on Monday has a silver backing. It forces us to face how we can react during a full-blown bear market. If you’re afraid of a 2% fall, the S & P 500
SPX,
-1.83%

It plummeted 57% (as during the Great Financial Crisis) or 49% (as when the Internet bubble burst).

It’s too common to pay attention to the wind and throw towels to the bottom when the market is high, so you have to deal with these unpleasant memories. Of course, that’s the exact opposite of what you have to do. Because that means you buy high and sell low.

read: The proven forecaster says it expects to revise less than 10% of US equities by mid-August.

Even professional stock market advisors are vulnerable to this pattern of behavior. For example, at the top of the US market in October 2007, the bear market triggered by the major financial crisis had begun, so my Hulbert Financial Digest-monitored investment newsletter model portfolio averaged 58% in equities. It was invested. By the bottom of the market in March 2009, 28.4% of these portfolios were equities.

As you can see from the graph below, the same pattern occurred during the burst of the Internet bubble. At the top of the US market in March 2000, the average exposure level of the newsletter model portfolio was 69.5%. At the bottom of October 2002, it was 38.9%.

Breaking down this pattern is very important to you. Indeed, it is impractical to be able to identify the exact top and bottom. This allows the bottom to have a higher equity exposure level than the top. A more realistic goal is to determine the level of equity exposure that can be kept constant across the bear market.

The 100% equity exposure level is not eligible for most of us. Claude Erb, a former fixed income and commodity manager at mutual fund firm TCW Group, once emailed me: “

This psychological truth is shown in the investment newsletter, where the model portfolio was fully invested in equities at the top of the bull market in October 2007. Their portfolio was at the bottom of March 2009 with only 26.2% invested in equities. In other words, it is more than 70 points lower. In contrast, consider an advisor whose top recommended equity exposure in October 2007 ranged from 40% to 50%. Their equity exposure levels were not only low at the bottom in March 2009, but were actually slightly higher.

So these more conservative portfolios may have seemed ridiculous when the market was soaring, but they definitely got the last laugh. They were in a good position to take advantage of the stock market snapback rally from the bottom of March 2009.

Having only 40% to 50% invested in stocks may not be the right exposure level for you. But you shouldn’t waste your time finding out what that correct level is. At the bottom of the next bear market, you will be glad you did.

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a flat rate to be audited.He can reach at mark@hulbertratings.com

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Opinion: How to stick to your money when stocks are falling

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