How bad does it get when the market really crashes? Well, historically, the S&P 500 has dropped by an average of 33% during bear markets. In more than a third of bear markets, the index plunged by more than 40%. I’m not going to sugarcoat this. If you’re someone who panics, sells everything in the midst of this mayhem, and locks in a loss of more than 40%, you’re going to feel like a grizzly bear mauled you for real. Even if you have the knowledge and fortitude not to sell, you’ll likely find that bear markets are a gut-wrenching experience.
If you take one thing away from this book, let it be this. So many people set their bar as the S&P 500, not realizing what that volatility actually feels like when it comes. Unless you have lived through bear markets without cashing in any of your ships, or better yet, made the decision to invest more during the downturn, you don't get to say you have the stomach for it. It always feels like the drop is different (and perhaps worse) than the ones in the rear-view mirror.
I took over management of a family trust in 2007, right before the market collapsed in 2008. It was the largest sum of money I had ever dealt with, and it felt terrible to see it drop precipitously within months. I had trailing stops that automatically sold out of many of those positions and was frightened to re-invest. How long was the downturn going to last? Thankfully, I regrouped and put that money back to work right away. When the market recovered, it came back insanely fast; so fast that if I had waited and tried to time it, I would have missed a large percentage of the recovery. I'm happy I handled it the way I did but it was a rude awakening to what it can feel like to manage other people's money.
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