Investors have been tested this year — do you have what it takes to succeed?

There’s no question about it: These are tough times for investors in the stock market.

“These are the times that try men’s souls,” as Thomas Paine wrote in The American Crisis about 240 years ago, when the success of this fledgling country was uncertain and untested.

Now, in 2022, investors are being repeatedly tested: Do they have what it takes to succeed? That means, among other things:

• Do investors have a good long-term plan they believe in?
• Have they accurately figured out their tolerance for risk?
• Do they have faith in the long-term future of our economy?
• Do they have the guts, the grit, the courage, to look beyond today’s pain, to tune out the noise, and to stick to their plans?
  

I don’t have to remind you of our current predicament. The fact that the S&P 500 SPX,  -0.39%  was recently down 24.8% from its high the first of the year. The fact that the officials in charge of our economy are predicting more pain. The fact…and it IS a fact…that nobody can tell us when things will turn around.

As long as I’m shoving the truth in your face, here’s another uncomfortable fact: Bear markets and corrections are normal. Sorry for that, but there’s no denying it.

Over the years I have repeatedly promised investors that if they own equities, they WILL at some point lose money. In the past, for broadly diversified portfolios, those losses have always been temporary. But of course this benefited only investors who held on to their investments.

The bad news, which you already know, is that you can’t control what the market is doing now and whatever it’s about to do.

One tried-and-true bit of investment advice is: Control what you can, and don’t let the other things control you. It seems simple, but it’s often the hardest part of being an investor.  

Among other things, you can (and should) control what you pay in expenses; the equity asset classes in your portfolio; the choice between active management (picking stocks) and passive management (index funds); the amount of fixed income funds you own in order to reduce your volatility; how much attention you pay to the stock market’s daily, weekly and monthly ups and downs; where you place your trust for advice; and of course how much and how regularly you add to your savings.

In theory, you can also control your emotional reactions to the market. However, this is much easier for some people than for others.

Nevertheless, you CAN control what you do in response to the market.

If you change your behavior as an investor because of what the market is doing, then you are acting like a market timer. On the other hand, if you stick to your plan through thick and thin, then you are buying and holding.

All the evidence I’ve ever seen indicates the latter choice is the better choice, even though it can seem counterintuitive.

Imagine you’re sailing a boat or piloting a ship across the Atlantic Ocean and you run into a fierce storm. Your smartest move is to change course and sail to safety. Otherwise, you’re in danger of stubbornly asking for trouble.

But investing in a bear market is different. When you’re at sea, you can probably figure out what the weather is likely to be, at least in the short term. You can tell when you’re finally out of a storm. You can (usually) tell when the storm is getting weaker or stronger.

But as an investor, you have no way to know how big the storm is, where it’s moving or when you’ll get to the other side. It’s as if (to return to the sailing metaphor) you can see very clearly what’s behind you, but when you look in any other direction, all you see is fog.

As an investor in a bear market, you can escape the storm for the moment, for example by selling your stock funds and keeping the money in cash.

But cash probably won’t get you to your long-term goals, and at some point you will need to get back into the market. The problem is: You’ll have no way to know when you should get back in.

Once it’s obvious that the storm has passed, you probably will have lost your best opportunity to recover.

On Wall Street and in the financial media, lots of advisers, managers and pundits can explain what is happening in the market at any given time. The reasons they cite will invariably seem to make sense.

The danger is that we come to believe that their predictions must also make sense. And yet, nobody can reliably predict the market’s future.

The compelling messages you’re likely to read, hear and see are about things you should worry about, things you should do. The reason isn’t hard to figure out.

•  Wall Street doesn’t make much money when you sit tight; if you DO something, there will most likely be fees, commissions, and probably hidden costs.
• The financial media understands that the best way to attract and keep audiences (and advertisers) coming back is to get people excited, anxious, nervous—anything but serene.

Bear markets seem to come along on average every four to five years, with losses averaging 30%. But it can get considerably worse. The worst drawdown of the S&P 500 in the past half-century was a loss of 51% (based on monthly data).

However, for investors who held 40% of their portfolios in government bond funds, the loss was “only” 31.3%.

Earlier this year I wrote an article about the historically worst times for other combinations. The biggest takeaway from that study is that portfolios with higher risks also gave patient investors higher long-term returns.

There’s an old saying in sports that offense sells tickets, but defense wins games. This is a time for defense. In my view, the best way to defend what you have is to find the proper mix of equities and fixed-income funds, and then stick with your plan.

In addition, it usually helps to turn off the TV and turn your attention elsewhere.

For more on this topic, see my latest podcast, “The biggest challenge to successful investing.”

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors of “We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement.” Get your free copy.

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