A Consumer’s Guide to Navigating the Current Bear Markets — Part 2

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Editor’s Note: In the first article in this series about investing in the current markets John H. Robinson, founder of Financial Planning Hawaii, examined where to park your cash and how to invest in bonds. In Part 2 he discusses the nuances of investing in stocks, real estate and cryptocurrency. John’s advice is buttressed by links from publications such as the NY Times, Wall Street Journal, Atlantic and other publications to assist in your research.



As of this writing the S&P 500 Index is down more than 22% from its January 2022 peak while the NASDAQ Composite Index, a popular large-cap technology stock index benchmark is down more than 31% from its previous high water mark.  Most consumers invest in the stock market for long term wealth accumulation, and the asset class has historically produced significant nominal and real returns.  Most consumers know (or should know) that there may periods of time when stock prices decline.  However, it is one thing understand the concept and quite another to see the reality reflected on one’s real-world portfolio values. 

To manage stock market downturns, investors need to come to terms with too issues  – understanding that the depth and duration of the stock market down turn is unknowable and determining the degree to which their investment portfolios may be exposed to permanent losses as opposed to temporary declines.  The 35% one-month decline in the U.S. stock market in February and March 2020 was a useful learning experience for many younger investors who had never seen real market volatility. 

However, that downturn proved to short-lived.  While it is true that the overall stock market has recovered 100% of the time from all previous bear markets, consumers need to know that two downturns of more than 50% occurred in in the 2000s.  Both declines last nearly 3 years and the recoveries took just as long.  Simply put, short term money, which I define as funds you might need to spend with in the next 5-7 years probably should not be invested in the stock market. 

In terms of assessing the risk of permanent loss, there is a long list of formerly “hot” VC-funded “unicorn” startups with brilliant ideas but no proven path to profitability.  Many of these companies are already trading down 70-90% from their former peaks.  Investors in these companies should realize that there is a very real possibility that many of these companies may not survive now that they have burned through their capital and are still not profitable.  We saw this when the dotcom stocks when the internet bubble burst in early 2000.  We saw this to a degree with the cannabis stocks a few years ago.  Even investors who “diversified” by owning baskets of these companies in sector ETFs are not safe from permanent losses.  Most of the red-hot Internet funds of the 1990s either never recovered or were merged out of existence.

That is not say that the stock market is all doom and gloom.  Investors who are saving for retirement in their IRAs and/or retirement plans and who are investing on a truly broadly diversified basis using investments such as index funds/ETFs should view market downturns as opportunities and should even hope that the stock market stays down for an extended period of time.  The knee-jerk reaction among 401(k) plan participants is often to cash out of stocks and stop contributing when bear markets occur.  Sadly, that is exactly the opposite course that most should take.  Down turns in the stock market are only problematic if you are forced to sell to meet expense needs when it is down.  For long term investors it is a golden opportunity to buy when the stock market is on sale.

For people who are already retired, the advice is only slightly different.  Ideally (i.e., if properly planned in advance), those approaching retirement and those who are already retired should have at least 5-7 years of retirement savings in safe, liquid investments with no exposure to market risk so that they are not forced to sell stocks when they may be down.   To the extent that retirees have money available to invest in healthy companies that pay dividends and have a demonstrated proclivity for raising their dividends at or above the rate of inflation, rising dividend stocks may offer down market opportunities as well. 

At this time, there are many companies that are more than 20% off their previous highs, with current yields in the 2-4% range that have consistently grown revenues, earnings, and dividends.  Consumer should understand that investing in these companies is not risk free and that they are obviously not immune to volatility.  Nonetheless, investing in a diversified (by industry sector) mix of 15-20 or more of these companies can be a reliable source of inflation-resistant passive income while offering appreciate potential over time as well.   Qualified dividends are also tax-favored relative to ordinary income.

Some more seasoned investors who have been through previous downturns may be wondering if now is the time to double down and load up on stocks with prices of many great companies down 20% or more.  My advice is that it is fine to continue to add, but not to be overly aggressive in diving into the market.  Keep in mind that the downturn only began a few months ago and there is no way to tell how long it will last or how much more it may decline.  Measured, consistent investing throughout is just fine.

How to invest during a bear market (NY Times)

How to Stand Up to a Bear Market (Wall Street Journal)

Help beat inflation with dividend stocks (Fidelity)

The End of the Millennial Lifestyle Subsidy (The Atlantic)

The Unraveling of Robinhood’s Fairy Tale (Robinhood)

Many Unicorn Startups Could Become Zombies (Axios)


Like stocks, real estate has historically been a wonderful way to accumulate wealth over time.  In fact, the $500,000 capital gains tax exclusion for married couples ($250,000 for single people) on the sale of one’s personal residence makes home ownership a uniquely attractive investment.  However, there is a perception among some consumers that real estate is a great investment because it always holds its value. 

In truth, the risk profile for real estate is not all that different from stocks.  Real estate investors and speculators/flippers in many parts of the country (most notably California and Florida) got a very real taste of that when the sub-prime mortgage market collapsed in 2008.  Foreclosure rates soared and home prices plummeted in many areas of the country.  In Hawaii, prices largely held firm through that period.  The last major real estate bubble in our island paradise occurred with then Japanese real estate bubble burst in the early 1990s.  It took more than decade from some properties in Hawaii to recover from that event.  

In the past 6 months, 30-year mortgage rates have risen from under 3% to over 6% in some parts of the United States.  Given that each 1% rise in interest rates raises the lifetime cost of homeownership by roughly 10%, it is difficult to imagine how inflated real estate prices can be sustained. With fewer borrowers able to afford homeownership, it stands to reason that the decrease in demand will ultimately lead to falling home prices and increased inventory.

In this environment, consumers who purchased homes, even at inflated prices can take comfort in knowing that they financed the purchases at historic low interest that may never be seen again in their lifetimes. My message to them is, “Enjoy your homes and your remarkably low monthly mortgages payments that are mostly principal.”  My message to would be buyers, especially those with cash, is that prices may be much lower a year or two from now.  Sellers who may be nervous would be wise to consider lowering their prices sooner rather than later.  Would-be sellers who are holding for prices set when mortgage rates were lower run the risk of holding onto their properties much longer than they may desire. 

What about the Rent vs. Buy decision and does it make sense for homeowners who sold, rent for a while before repurchasing? In a recent article, Paul Owers, a housing researcher at Florida Atlantic University long time journalist covering the Florida real estate market states, “Despite rapidly rising rents, prospective buyers in many U.S. markets could build long term wealth faster by renting a similar single-family property and investing the money that otherwise would have been spent on owning.” Later in the article, Ken H. Johnson, Ph.D, a real estate economist at FAU is quoted as follows, “Buying near the peak of a real estate market is never a good investment strategy. Even though rents are high right now and rising, renting becomes a hedge against locking in a home price that is too far above a market’s long-term pricing trend.”

Home Prices Have Begun Falling: Here Are the Cities Where They’re Down the Most (Realtor.com)

Mortgage rates hit 6.3%—the real cost to buy a house has officially spiked over 50% in just 6 months (Fortune)

A 1% Rate Increase will Decrease Your Buying Power by 11% (Mortgage Insider)

Is it Better to Rent or Buy in a Hot Housing Market? (Wall Street Journal)

Housing Index Shows Why More Consumers Should Rent Rather Than Own (FAU News Desk)


Cryptocurrency is an odd duck in the investment world and I have traditionally been reticent to discuss it my communications.  The reason is that it is not really an asset class.  That is to say that there are no underlying fundamentals that could be considered to attempt to forecast its future.  A counter argument to that – and the central thesis for crypto’s raison d’etre – is that it should be treated as a non-sovereign currency.  However, all sovereign currencies have a central government behind them that is the basis for their relative valuations.  For instance, there are sound fundamental reasons why Venezuela’s bolivar is viewed as less stable and weaker than the U.S. dollar.  With crypto currencies, one can argue that it is valuable asset for nefarious individuals, corporations, and rogue nations to store and transact ill-gotten wealth, but I am not sure that is enough to build a credible investment thesis.   At the same time, crypto is in the media so much that it is difficult to ignore.

As a financial planner, my approach to clients who inquire about crypto is to treat it as if it as I would an “idea stock” – a much-hyped company with a novel but unproven investment thesis that is still far generating revenues or profits.  This would apply to many of the recent “unicorn” startups over the past several years.  In this vein, I never advise clients to avoid crypto, as I certainly don’t want to be the person who kept you from getting rich if its hypothetical future value becomes reality.  However, I caution investors not to underestimate the speculative risk and to find the balance between investing enough to change your lifestyle if it really his big, but not so much that it will permanently hurt your financial security in the more likely event that it fails.

Currently, the cryptocurrency market space is in turmoil. My sense from having been through other market bubbles bursting, is that the bloom is off the rose, and that there is growing widespread skepticism over the future of crypto currencies and the myriad derivative cryptocurrency trading platforms that have sprung up.  In speaking at a technology conference last week, Bill Gates described cryptocurrency valuations as being driven solely by “Greater Fool Theory” – the notion that pricing is determined solely by the hope that someone will be willing to pay more than you did rather than having any meaningful fundamental valuation.  Similarly, economist and NY Times columnist Paul Krugman last week likened the crypto currency market to a Ponzi Scheme.

Further contributing to the changing perceptions are the invalidation of two primary selling points that crypto proponents have touted as reasons to be bullish on the market’s future – (1) that crypto is valuable as an inflation hedge and (2) that it is safe and secure. The former claim was the source of Krugman’s ridicule (see article link below).  With respect to security, within the last 12 months there have been three separate hacking events in which security flaws were exploited to extract $325 million, $540 million, and $611 million.  That is not chump change and there have been countless other large-scale hacks as well. 

There is no FDIC to give victims their money back.  As one of the article links below stated, “Experts say cryptocurrency is increasingly being seen as low hanging fruit by hackers…Crypto transactions are irreversible, so if a hacker can get their hands on it, it’s very difficult for anyone to retrieve it.”  These high profile heists obviously cast a huge pall over consumer sentiment, but hacking is not the only fraud threat.  The unregulated nature of the crypto ecosystem lends itself well to a wide variety of fraudulent behavior including rampant pump and dump schemes. The failure of these crypto mantras undoubtedly also contributing to the decision by legions of scorned consumers to  abandon crypto trading, most likely for good.

Count me among the crowd that believes “investing” in crypto is akin to buying a box of air.  In full disclosure, I do not own, nor have I ever owned any form of crypto currency.   I do not proclaim to be an expert in cryptocurrency investing, so I discourage any consumer from using my opinion alone to avoid buying it.  However, I am an expert in financial planning, and, on that score, I encourage all investors to be judicious in the amount of capital you commit if you do decide to board the Crypto Crazy Train.  If you are already in and down big and you invested more of your savings than you should have, I have no idea how to advise you.  The same applies to people overloaded on unicorn idea stocks.  Once the bloom comes off the rose, it rarely blossoms again.

Wasn’t Bitcoin Supposed to Be a Hedge Against Inflation? (NY Times)

Bill Gates says crypto and NFTs are 100% based on greater fool theory (CNBC)

The Crypto Party is Over (Wall Street Journal)

Trillion-dollar crypto collapse sparks flurry of US lawsuits – Who’s to blame? (The Guardian)

The Crypto Firms that Bought Those Superbowl Ads aren’t so Super Anymore (Wall Street Journal)

What a $600 Million Hack Says About the State o Crypto (BBC News)

How Crypto Investors Can Avoid the Scam That Captured $2.8 Billion in 2021 (NextAdvisor.com)

John H. Robinson is the owner/founder of Financial Planning HawaiiFee-Only Planning Hawaii, and Paraplanning Hawaii.  He is also a co-founder of fintech software-maker Nest Egg Guru.




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