All bull markets must come to an end. Many of the gains of the last few years were abruptly wiped out in just a month’s time. The argument could be made that bear markets are healthy and are sometimes referred to as a feature, not a bug. I’ve come to believe that there are four stages of a bear market, each with their own emotional issues and include at least two decision points that could arise on our journey through the downturn. I’ve illustrated these below.

The Bull Market

For years on end, we are moving right along with continual gains in our portfolios. These gains can go on for just a few years or a decade or more as they did throughout the 2010s.

But, at some point…

BAM!! A crisis occurs.

The crisis is like the antagonist of any gleeful story. It’s there to cause disruption in every way imaginable.

Stage 1: The Crisis

The onset of any bear market must include lots of big, bold, red font on TV with the words “SELL OFF” or “Markets in Turmoil.” This is to be expected. If you are nearing retirement, you’ve been in the game for a while and know this is what happens sometimes. You’ve seen all of this before, albeit for different reasons each time. Yet, despite knowing these events are coming, each crisis is met with a feeling of utter shock. It’s almost as if we have been lulled into thinking that the bull market could last forever.

Once the crisis is in full swing, we are met with our first Decision Point.

Decision Point #1 & Stage 2: Acceptance or Panic

The choice facing every investor at the onset of a full-blown crisis is pretty simple:

(1) Accept that enduring this type of event is part of successful investing.

OR

(2) Panic.

Make no mistake. This is a choice. I doubt if anyone is being forced against their will to choose either option. Assuming that’s not the case, at some point in the crisis, we are met with our first decision point.

Choose Acceptance:

Many investors who are nearing retirement become inured to choppy markets. It’s unpleasant but is an unavoidable part of the process. So, they accept that these events are part of the deal and ride them out. They have, in many cases, wisely adopted a portfolio strategy that allows them to deal with them without too much trouble. Those who haven’t…

Choose Panic:

Option two is outright panic. Get me out of the market so I can breathe again. I’ve seen enough and can’t handle it anymore. For reasons x, y, and z, I think the market is going to keep going lower and believe it’s smart to get out now. I’ll get back in when it’s safe again.

Panic always SOUNDS smart. We were born to believe that running from danger is the best course of action. The evolutionary process has not yet removed our proclivity to run from the first sight of danger. So, we’ll sell and wait it out until calmer markets and sanity return.

The problem is that sanity rarely returns until long after the bottom is in our rearview mirror, so it’s hard to convince ourselves when it’s time to get back into the market. The double-dip prediction (that never really materialized) from the Great Financial Crisis kept a large number of investors out of the market for a number of years - if they ever got back in at all.

At some point though, the crisis will soften and the recovery will begin.

Stage 3: The Recovery & Decision Point #2

We are all aware that, historically, every downturn we have ever experienced has been met with a recovery. Some recoveries have been swift and others have been slow to get moving. But recoveries have come 100% of the time. It’s inevitable. We know blue skies will return. How could they not? All of history and our entire lives have shown this to be true. It’s the timing of it all that is in question and can cause us to stumble.

For those who chose acceptance following the crisis, the recovery is where things start to feel more optimistic again. The worst of the crisis is behind us and we can move ahead. We begin to feel that the future is bright.

For those who chose to panic when the crisis occurred, there is a second decision still to be made as the markets have moved on without them.

Decision Point #2: Acceptance or Permanent Damage

With the stock market’s road to recovery well underway, those who panicked must now make a new decision. They can accept that they were wrong to panic (a really tough thing to admit) or stick to their guns and potentially cause permanent and irreparable damage to their long-term plan.

If acceptance is the decision, the investor must understand that the water may be cold once they jump back in. It’s possible that the minute they jump back into the stock market, the waters could be choppy. But this is why they must choose acceptance before recovery can begin for their retirement portfolio. If lessons have been learned and wisdom prevails, stay the course will be invaluable advice. If not, the cycle begins anew with permanent damage a likely outcome.

Stage 4: A New Bull Market

At some point, the markets will reach new highs again as all bull markets do. New market-highs shouldn’t be a cause for concern despite what the media tells us. In all likelihood, we’ll get to experience quite a few new highs since the market trades at all-time highs on about 7% of days.¹ These new highs, of course, must all occur in the new bull market so they can come in bunches.

That is, at least, until we reach the final new high for that bull market. Unfortunately, the market doesn’t announce to us which one is the last one, but we know that eventually, there will be a new crisis with decisions to be made.

It may sound like a broken record as often as I say it, but having a plan for when this occurs is likely the only viable defense against poor decision making in the face of a crisis. Now is the time. There is no better time than now to build a plan if you are wondering what you should be doing during a time filled with so much uncertainty.

I’m curious though…

Where in the cycle do you believe we are in as we speak? Are we still in crisis mode or has the recovery begun? If not recovery, how long until you believe we make the shift? I have my opinions, but I would love to hear from you - email me your thoughts: [email protected]

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I hope you and yours are safe and healthy!

*Credit to Alan Weiss for the inspiration of the visual.

¹ From Ben Carlson’s Blog A Wealth of Common Sense: Don’t Be Afraid of All-Time Highs in the Stock Market

This post is not advice. Please see additional disclaimers.