Capital Preservation: In a Bear Market, He Who Loses the Least, Wins

by KenFaulkenberry

in Risk

Capital Preservation in a Secular Bear Market
Capital Preservation in a Secular Bear Market

The long time publisher of the Dow Theory Letters, Richard Russell advises “In a bear market, he who loses least, wins.”  This is an important investing concept that is ignored by most investors. Large investment asset losses can be devastating to a portfolio in a secular bear market.

What is a Secular Bear Market?

A secular bear market is a long term period in which investment prices fall. This is different from a cyclical bear market or correction which is short term in nature. Secular bear markets usually take place after a secular bull market of many years, or even an asset bubble.

In secular bull markets prices usually move higher with relatively shallow corrections. However, secular bear markets usually exhibit high stock correlations, and extreme volatility with sharp and unrelenting moves both up and down; sound familiar?

Typically, secular bear markets psychologically wear investors down; and by the end many have abandoned risk taking altogether. This is the point where the next secular bull market begins.

Key to Investing in a Secular Bear Market

Capital Preservation is the key to investing in a secular bear market. If you lose 50% of your portfolio it takes a 100% gain to breakeven. This is because you no longer have the money you lost to invest. Compounding works miracles when gains are compounded over time. But the laws of compounding are cruel when large losses are allowed to destroy years of growth or major portions of an investor’s portfolio.

Related Reading: Portfolio Volatility and the Impact on Performance

One of the reasons average investors experience much lower returns than they should is because they learn the right lessons at the wrong time. Investors were taught to buy and hold in the bull market of the 80’s and 90’s. This strategy works when the market starts out cheap and rises for 20 years.

Buy and hold is still the dominant belief even though it has delivered little returns over the last 12 years. A secular bear market requires a different investing strategy where the emphasis is placed on preservation of capital versus more aggressive asset allocation strategies. This means it is more important than ever to invest at price levels that put the odds of profit heavily in your favor.

The prudent strategy in secular bear market investing is to make capital preservation the highest priority until there is evidence that a new secular bull market has begun.

More Related Reading: Why Tactical Asset Allocation is Changing the Investment World

Written by KenFaulkenberry

KenFaulkenberry

AAAMP Blog by Ken Faulkenberry
Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record.
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{ 2 comments }

Marco

Thanks a lot for your information, it´s very important for me.
Marco

KenFaulkenberry

Glad to help. Thank you.

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