Jon K. Hancock, Hancock Advisors, LLC
Meet the Author: Jon and Sarah Hancock have lived on Schilling Road in High Prairie since the spring of 2020. Jon reports, “We have three dogs, three cats, three sheep, four chickens, and a horse. Sarah is the new volunteer fire chief. I’m a ‘registered investment advisor’ (and a fiduciary to my clients – I look out for them).”
One of the biggest fears for people in retirement or approaching retirement is the loss of a substantial part of their hard-won savings due to a stock market crash. However, sitting on the sidelines now has its own real drawbacks due to continued excessive inflation. After a lifetime of investing experience, I am satisfied there is a better way to participate in the markets with the peace of mind that comes from knowing how to greatly limit the severity of bear markets.
The situation we are facing in 2023 is unlike any the US has seen in almost 50 years. The 1970’s were a decade with a toxic combination of high inflation, rising interest rates to fight inflation, a bear market for stocks as a result, and high job losse. It’s no wonder the “Misery Index” was created during this time.
2022-2023 is similar to the 1970’s:
• High inflation: CPI increased 6.5% over the 12-month period ending December 20221
• Interest rates: In 2022 the Fed raised from .8% to 3.83% (now 4.58%)2
• Stock market: In 2022 the S&P 500 lost -18%3 and the NASDAQ lost -32%4
● Job losses: Employment is strong for now, but major companies such as• Google and
Microsoft have begun layoffs.
In order to prepare for the future, we ought to look back and appreciate the past. If history is a guide, here are some lessons from the S&P 500:
• The Great Depression 1929-1932
-83.65% loss from all time high – 34 months to hit bottom – 15.5 years back to
• The Great Financial Crisis 2007-2009
-50.80% loss from all time high – 16 months to hit bottom – 4.41 years back to breakeven.
In 2008, buy-and-hold investors learned the hard way about typical diversification as it is commonly practiced by amateur and professional alike: equities, bonds, and real estate prices all plunged together. There was seemingly no refuge, and for most people the diversification they relied upon to protect their accounts failed them. The lesson of 2008 is clear – typical diversification does not work when you need it most. These were very challenging periods for investors, and God forbid that we ever experience a period where all markets behave this way at the same time again. However, given the amount of total debt and leverage in the system, we can’t entirely rule out this possibility during our investment horizon.
To avoid the worst of a bear market an investor must consider alternatives to the same old ways of investing in the same old markets. The method that offers effective diversification is known as “systematic asset rotation,” also called “tactical asset allocation.” This type of investing doesn’t rely on owning a static portion of every asset class in hopes of reducing risk; instead it is a systematic way of owning winning assets based on tried and true rules put in place to guide our buy and sell decisions.
Here are the keys to avoiding steep bear market losses:
1. Using a simple momentum calculation, rotate into strong asset classes and out of weak ones on a regular schedule. This cuts losing positions and lets winners run.
2. Know and respect the signals that differentiate a bull market from a bear market. There are
times that taking risk is rewarded, and there are times it is punished, so act accordingly.
3. When conditions warrant, temporarily go to a defensive risk-off posture in cash or cash
equivalents until appreciating assets are found again. There are times that cash is the very
best asset class.
4. Upon finding performing asset classes, tilt your portfolio in that direction and repeat the
The proliferation of exchange-traded products (ETFs and ETNs) allows us to easily, efficiently, and systematically invest in baskets of US and international equities, US and international bonds, real estate, precious metals, and even commodities and currencies. Almost always one or more of these asset classes is working in our favor. For example, even during the depths of the Great Depression gold prices moved substantially higher over many years.
While we cannot predict the future, we can evaluate our investing environment and make adjustments as necessary. Utilizing systematic asset rotation and respecting risk-off signals are key to avoiding the worst of bear market drawdowns. If you would like to learn more about how to invest confidently and without worry, feel free to contact me at email@example.com or (360) 776-6600.