The Bear Market Default
Prepare your portfolio and mind so doing nothing remains possible during a crash
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 98%
The Bear Market Default begins by accepting declines as an inevitable feature of long-term investing. Before a crisis, the investor determines both financial risk capacity and emotional risk tolerance, then tests those limits against the losses their portfolio could experience. Diversification and asset balance provide structural preparation, while reviewing past reactions and writing a response policy provide mental preparation. When a bear market arrives, the default for a suitably positioned long-term investor is to do nothing rather than convert temporary volatility into a permanent loss. Investors with continuing income may keep making scheduled purchases at lower prices. The mechanism works only when preparation occurs before fear becomes intense.
Origin
Extracted from Masters in Business, where Jack Brennan summarized the bear-market chapter of More Straight Talk on Investing.
Core principles
- 01Bear markets are inevitable over a long investing life
- 02Risk tolerance must be tested against actual portfolio losses
- 03Structural preparation and mental preparation are equally important
- 04Inaction is usually safer than panic
- 05Regular investing can turn lower prices into an advantage
How to run it
- 1
Accept inevitability
Assume that meaningful market declines will occur during any long investing horizon. Plan for them as recurring conditions rather than exceptional surprises.
Pro tip Study several historical declines rather than anchoring on the most recent one.
Watch out Treating each bear market as unprecedented invites impulsive decisions.
- 2
Measure risk tolerance
Estimate how a plausible decline would affect the portfolio and ask whether that loss would impair sleep, spending, or essential goals. Distinguish emotional discomfort from actual financial incapacity.
Pro tip Translate percentage declines into currency amounts before choosing an allocation.
Watch out Risk tolerance stated during a bull market is often overstated.
- 3
Prepare the structure
Set diversification and the balance between risky and defensive assets so the expected decline remains survivable. Complete this work before markets fall.
Pro tip Keep near-term liabilities out of assets that may need years to recover.
Watch out A portfolio that depends on selling during a decline cannot rely on inaction.
- 4
Prepare the mind
Review how you behaved in previous selloffs and write down what you will do during the next one. Make the long time horizon explicit.
Pro tip Keep a brief bear-market note beside the investment policy.
Watch out Information consumed during a crisis can override intentions formed during calm periods.
- 5
Use inaction as the default
When the decline arrives, avoid changing a suitable long-term portfolio merely because prices and headlines are alarming. Act only if goals, liabilities, or personal circumstances have genuinely changed.
Pro tip Require any proposed sale to identify which pre-existing rule authorizes it.
Watch out Doing nothing is unsuitable if the original portfolio was structurally inappropriate.
- 6
Continue regular investing
If income and cash reserves permit, maintain scheduled contributions so lower prices purchase more assets. Do not attempt to identify the exact bottom.
Pro tip Automate contributions before volatility begins.
Watch out Never invest emergency cash solely because markets have fallen.
In the wild
A worker with decades until retirement reviews her diversified allocation during a sharp decline. The loss remains within the range she modeled, so she makes no reactive sale and continues her automatic retirement contributions.
→ She avoids locking in the decline and acquires additional shares at lower prices.
Brennan recommends that experienced investors recall October 2008 and ask whether they could sleep and how they reacted. That observed behavior supplies better evidence of risk tolerance than an abstract questionnaire completed during calm markets.
→ Past conduct informs a more realistic portfolio allocation.
Common mistakes
Discovering tolerance during the crash
Waiting until prices collapse to decide how much risk is acceptable makes fear part of the portfolio-design process.
Mistaking action for control
Selling in response to frightening headlines can feel protective while permanently impairing long-term results.
Using emergency reserves to buy
Dollar-cost averaging is beneficial only when it does not compromise liquidity needed for near-term obligations.
Is it for you?
Best for
It is best for investors with diversified portfolios and time horizons measured in years or decades.
Not ideal for
It is not ideal for investors who need the affected assets for near-term spending or whose portfolio exceeds their true risk capacity.
From the transcript
“they're an inevitable part of investing if you're investing over a career”
“you prepare structurally in your portfolio and importantly in your mental preparation.”
“So do nothing should be your default option during a bearer market.”
From the episode
Jack Brennan on Succeeding the Legendary John Bogle (Podcast)
Jack Brennan