The critical importance of recognizing the direction of the general market cannot be ignored. I’ve realized a 33% loss in a portfolio of stocks requires a 50% gain just to recover to your break-even point. ?
For example, if a $10,000 portfolio is allowed to decline to $6,666 (a 33% decline), the portfolio has to rise $3,333 (or 50%) just to get you even. ⚖️ Therefore, it is essential to try to preserve as much of the profit you have built up as possible rather than to ride most investments up and down through difficult cycles like many people do.
I generally have not had much problem recognizing and acting upon the early signs of bear markets. However, twice I made the mistake of buying back too early. When you make a mistake in the stock market, the only sound thing to do is correct it. Pride doesn’t pay. ?
Most typical bear markets ? (some aren’t typical) tend to have three separate phases, or legs, of decline that are interrupted by a couple rallies that last just long enough to convince investors to begin buying. Such rallies can last 15 weeks.
Many institutional investors, like myself, love to “bottom fish.” ? Which is when we start buying stocks off the bottom and help make the rally convincing enough to draw you in. In conclusion, any investor will usually be better off staying on the sidelines in cash and avoiding short-term counterfeit rallies during the first few legs of a bear market.