This Is How You Can Score High Income in a Bear Market
Think twice before bailing on the bear...
Two factors separate a selloff from a real bear market for stocks—one that makes the history books as a time of pain and suffering for investors.
The first is sufficient wealth destruction to wreak havoc in the real economy. That was the case in 2007-09, when the Financial Crisis market crash melded into what came to be called the “Greater Recession.” It was not the case for what happened in early 2020 following the early stages of the pandemic, as stocks recovered an almost equally steep decline within a few weeks.
The second essential characteristic of a real bear market is the downside lasts long enough to change investor behavior, for example from being conditioned to simply buy the dips. That was the case following the 2007-09 debacle. In fact, it was more than six years before the S&P 500 topped its previous high water mark, set October 11, 2017.
In my view, this year’s damage to stocks still doesn’t stack up as a real bear market. But it’s getting awfully close to that—as the Federal Reserve jacks up interest rates to quell the highest inflation in 40 years, the world’s number two economy China softens and European chaos grows as Russia’s Ukraine invasion and resulting sanctions drag on.
Investment media frequently define a bear market in stocks as a decline of at least 20% in the S&P 500 from the previous high. A real bear market, however, usually does far more damage. The S&P 500, for example, fell more than -56% from its October 2007 high point to what proved to be the low in March 2009. It was off almost -50% in the bear market before that, which ran from early 2000 to late 2002.
Clearly, whenever risk is rising for losses of this magnitude, it’s critical for investors to prepare themselves. And that’s definitely the case now.
But what may surprise you is I’m not going to recommend anyone fully exit the stock market. In fact, despite what we’ve seen this year, there’s still not a suitable alternative to stocks for anyone seriously interested in building long-term wealth, or earning a living wage from investments.
Certainly bonds don’t qualify. Even after an historic meltdown this year, 10-year Treasury notes yield less than 3.5%. Cash alternatives pay much less. And while high quality stocks raise dividends every year, bonds and cash interest is mostly fixed, with inflation eroding it year-in, year-out.
If you’re going to stay in stocks, what’s been business as usual won’t cut it either. During the late, great bull market, many got used to “average” being good enough. In fact, giant marketing firms like Vanguard have aggregated literally trillions of investment dollars by belittling the whole idea of trying to increase returns by buying your own stocks, or worse paying fees for an advisor’s help.
The truth is you can make money in a bear market with wise stock choices—and you’re going to lose big time by just seeking out the lowest fee ETFs. The S&P 500, for example, lost nearly -25% of its value in the decade that began January 1, 2000. But the same dollars invested in oil company Chevron Corp (NYSE: CVX) returned 126%, or 147% if shareholders had reinvested dividends. And Chevron’s dividend over that time was increased nine times for a total of 123%--well ahead of inflation.
No matter how carefully you choose your stocks, they won’t all be Chevrons. Oil, natural gas and renewable energy companies do offer a massive investment opportunity in the decade ahead—just as they did in the ‘00s when Dominion Energy (NYSE: D) scored an even higher return than Chevron at 181%.
But 36 plus years of investment experience have taught me you’re going to have turkeys that never get off the ground to go along with the eagles that soar. That’s why I advocate a simple, three-rule strategy for making the most of these volatile times:
· Keep a sharp eye on the underlying business health of all stocks you own. This is actually by far the most important of the three rules. Companies that stay strong on the inside amid current inflation pressure and recession risk will keep paying their dividends. They’ll likely lose ground with other stocks so long as the bear market lasts. But when the cycle turns—and rest assured, it always does--they’ll lead the recovery, recovering all lost ground and then some. Conversely, we want to sell anything that doesn’t appear likely to measure up as a business, since that means elevated dividend risk and far deeper potential losses.
· Focus on the whole portfolio and don’t obsess on performance of individual stocks, be they winners or losers. So long as your underperforming stocks stay strong as businesses, they’ll recover fully. But we never want to invest so much in a holding that an unexpected mishap could sink the whole portfolio. Periodically balancing and diversifying between positions reduces the potential for a disaster in a single stock to sink the portfolio. So does avoiding moves like “doubling down” on a loser, which all too often become emotionally charged.
· Focus on valuations for both purchases and sales. I never pay more for stocks than is justified by historically sustainable valuations, underlying company business quality and prospective growth in dividends. Conversely, in a volatile environment like this one, I won’t hesitate to sell at least a piece of my position in any stock that runs up beyond a sustainable price. Odds are we’ll be able to invest that cash later at lower prices.
This is the underlying strategy I’m employing right now in my financial advisory business. And we’re also focused squarely on the best stocks of sectors positioned for profit, even as the averages keep sliding—oil and gas, renewable energy, real estate, metals, regulated utilities and more.
That’s how I intend to make what’s ahead an opportunity decade, even as others are already proclaiming it a lost one.