4 Things to Do When the Market Drops

By Charles Sizemore  |  January 2, 2019

On this New Year’s Day morning, I’m going to cut right to the chase. Stocks are in a bear market, and volatility is back with a vengeance.

So, I’m here to give you a four-point bear-market action plan.

First, sell everything.

Second, buy a 16-year supply of canned goods, shotgun shells, and diesel fuel for your generator. Also, if you don’t have a diesel-powered generator, buy one.

Third, convert what’s left of your savings to gold bullion.

And finally, seal yourself, along with your canned goods, shotgun shells, diesel, and gold, into your lead-lined bunker in Idaho to await nuclear Armageddon.

I sincerely hope you know I’m joking (mostly).

But during times like these, it does make sense to reevaluate a few things.

If I were to describe the behavior of the stock market over the last month of 2018 in layman’s terms, it might go something like this: Mr. Market beat himself brutally in the face with a Louisville slugger, to the point of near death, and then, to finish the job, put both of his feet in a bucket of fresh cement and jumped in the Hudson river… while punching himself in the face with a pair of brass knuckles on the way down.

It was that bad.

The S&P 500 dropped nearly 16% in just three weeks in what was the worst December since the Great Depression. The declines erased 19 months’ worth of gains.

Investing is risky, and it is precisely this risk that makes the long-term returns of 8% to 10% per year possible. If investing were “safe,” the returns would look a lot more like the returns you get in stodgy old government bonds. Learning how to navigate this risk is the single most important aspect of investing.

So, I really am going to offer a four-point action plan for navigating the bear market.

1. Revisit Your Asset Allocation

The first step is to take a top-down look at your allocation. Most investors put at least a little thought into their asset allocation when they start a new job or a new 401k plan. But I know very few people who regularly rebalance and really look at the allocation of their total nest egg in proper context.

You know the drill. As you age and get closer to retirement, you should gradually reduce your allocation to stocks and increase your allocation bonds and cash. But over the past decade, it’s highly likely you did the exact opposite. Stocks have gone straight up with practically no interruptions for nearly a decade. So, unless you’ve been rebalancing along the way – selling appreciated stock and putting the proceeds into safer assets – the percentage of your portfolio allocated to stocks has likely increased rather than decreased, meaning you’re taking more risk at precisely the time you should be taking less.

So, use this little spate of volatility as a wake-up call to rebalance. Make sure your stock allocation is reasonable at your age. That might mean realizing losses. But again, you’re really only giving up the last 19 months’ worth of gains. If you’ve been investing for years, you’re still well ahead of the game, and this is a tolerable loss.

2. Sell to the Sleeping Point

While I trust numbers over intuition, I still have to respect intuition. My gut instinct is not always right. In fact, it’s often wrong. But it’s often kept me out of trouble when a situation just flat-out didn’t smell right. It’s kept me from doing deals with would-be business partners that turned out to be crooks. And plenty of times, it’s prevented me from taking major losses in the market.

George Soros may very well be the greatest speculator who ever lived. But according to his son, his methods were not always as scientific as you might think. Soros would periodically get painful back spasms, and he would take these as a signal that there was something wrong in his portfolio. The pain was his body’s way of sending an early warning sign.

Now, you probably don’t have Soros’ instincts. I know I don’t. But if you’re feeling legitimate anxiety about the market, it’s probably a sign that you’re taking too much risk. You don’t have to pull a Soros andreverse a position, switching from long to short or vice versa. But you can at least take a little risk off the table. Sell down your stock positions to the point where you can sleep soundly at night.

3. Think Like a Trader Rather Than an Investor

As discussed ad nauseum in the financial press and in mutual fund literature, stocks “always” rise over the long term. But the “long term” might literally be decades, and you might not have that much time. Stocks went nowhere between 1968 and 1982 and again from 2000 to 2013. Sticking to a buy-and-hold strategy in a period like that is a recipe for frustration.

You don’t have to liquidate your entire long-term, buy-and-hold portfolio, of course. But you should really consider taking at least a portion of it to pursue active trading strategies that can actually profit from market volatility.

For example, my friend Lance Gaitan has a trading system that plays short-term “snapbacks” in the bond market, and Adam O’Dell has a long track record of successfully playing short-term trends in both bull and bear markets.

And naturally, my own Peak Profits strategy buys value and momentum stocks that are under the radar of most investors while also hedging during times of severe market stress like today.

Ideally, you’d spread your capital among multiple trading systems with little correlation to one another and, importantly, to the major stock averages like the S&P 500. Our goal here is to make money regardless of what the market does.

4. Invest for Income

Finally, get paid.

This is my specialty. My investing career started at the tail end of the 1990s tech bubble, so I learned very quickly how ephemeral paper profits can be. Capital gains can be here today and gone tomorrow. But dividends represent cold, hard cash and allow you to realize a real return without having to hope and pray that the market rises.

This is the focus of my Peak Income newsletter. Even after multiple years of rising bond yields, most traditional income products like bonds, CDs and even mainstream dividend paying stocks still offer yields that are far too low to really cover your expenses in retirement.

But in Peak Income, I hunt down high-yielding investments that have been mostly ignored by Wall Street. The current portfolio sports an average yield of about 6%, and I’m always on the hunt for more cash.

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR