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Building Wealth in a Bear Market

Investing in a bear market sure is exciting, isn’t it?

My first day on the job was July 3, 2006. It was a one-week locum tenens assignment in Punta Gorda, Florida that I started just after graduating from residency. The Dow Jones Industrial average (DJI) stood at 11,090, or about 500 points below where it was when I kicked off the new millennium on Bourbon Street wondering if the Y2K bug was real or not on January 1, 2000..

There was reason to be pessimistic about stock market returns. After all, a dollar invested six and a half years earlier was worth less than a dollar at the time.

I knew, however, to expect turbulence and volatility. I opened a SEP IRA (in hindsight, I’d open a solo 401(k) instead), and I maxed it out, investing in mutual funds to the tune of about $50,000 a year.

Fifteen months later, I was looking pretty smart. The DJI was over 14,000 in October of 2007, an increase of over 27% in just over a year.

Then things took a turn for the worse.

My investing behavior over the proceeding five years would determine my fate.




I hope, by now, you’re familiar with the term “stay the course.” It’s the title of John Bogle’s book telling the story of Vanguard and the index fund revolution. It’s also the answer to many of the “what should I do now” questions that pop up when a bear market rears its ugly head. These are not rare events; a bear market occurs about every three years, on average.


The Great Recession


To say that things took a turn for the worse for equities after October of 2007 is an understatement. By March of 2008, the DJI dropped below 12,000. It dropped below 11,000 in September of 2008, erasing any gains from the decade, and the pain had just begun.

By November of 2008, the DJI dipped to about 7,500, rebounded swiftly to 9,000, but dropped precipitously after that, bottoming out at 6,470 in early March of 2009, a 54% drop from the highs 18 months earlier.

The S&P 500, a broader index consisting of 500 U.S. stocks rather than 30, similarly tanked, losing 57% of its value over that same time frame.

The market had always bounced back before, but this felt different to a lot of folks. Goldman Sachs warned investors that another 40% drop could be in order.

The market did not drop another 40% but rather rebounded in fits and spurts, finally surpassing 14,000 in February of 2013 and more than doubled a second time, peaking at about 28,700 in February of 2020 before the next bear market began.


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Staying the Course


I saw those initial investments I made early in my career tank. Subsequent investments tanked a little less. But the overall trajectory for 18 months was down, down, down. It was a true stock market crash and part of one of the worst recessions in U.S. history.

It wasn’t easy, but I continued putting money into those mutual funds. I rode the wave down and by March of 2009, that SEP IRA was worth quite a bit less than the money I had put in.

Those were busy years in my life. I got married in 2007; we had our first child in 2008. We broke ground on a big, beautiful new home in the fall of 2007 and moved in May of 2008. I settled into my first “permanent” job as an anesthesiologist, taking call every third night and weekend with no post-call day off.

In hindsight, it’s a shame I didn’t have more money to invest at the time, but a good chunk of my income went into the new home, the wedding, the honeymoon, new things for the baby, etc…

I was maxing out that SEP IRA every year, and by 2010, we were past many of the “one-time expenses.” I started a taxable account with money that I earned doing some extra locum tenens work on the side that summer. At that time, the DJI was at about 10,000.

In February of 2013, the DJI finally reached 14,000 again, and it was up to 18,000 a year later. If the reinvestment of dividends are factored in, the recovery was a little bit quicker.

The S&P 500 calculator at DQYDJ shows about a 1.5% positive return from the peak in October 2007 by August of 2012. You had your original dollar (plus a penny and a half) back in four years and 10 months.




That same dollar invested at the pre-recession peak in October of 2007 before the financial crisis was worth $3.56 by May of 2022.

$1 invested near the nadir in March of 2009 had grown to $6.98, a nearly 7x return by May of 2022, even as the index flirts with what may be the second bear market of this young decade.


The Benefits of Investing in a Bear Market


Let’s look at three hypothetical scenarios with nice round numbers to make the math simple. All three scenarios will have the market beginning and ending the year at 10,000 points, and we’ll invest $10,000 into these markets each month. Shares will have a valuation of $100 apiece to start the year.

In the first scenario, the market remains steady at 10,000 points.

In the second, the market drop 1,000 points a month for four months, remains 40% down at 6,000 four four months, and rebounds by 1,000 points a month, climbing back to 10,000 points by the end of the calendar year.

In the third and final scenario,  the market will gain 1,000 points a month for four months representing a beautiful bull market, remain at 14,000 points for four months, and give up its gains 1,000 points at a time over the final four months.



Market One


In the steady, boring market, every month’s $10,000 investment buys 100 shares at $100 each. At the end of the year, your twelve $10,000 investments will be worth — you guessed it — $120,000.






The blue line represents the value of the stock market in each month. The orange is the end-of year value of a $10,000 investment in the stock market during that month. It makes sense that these are equal when the market doesn’t budge.


Market Two: The Bear Market and Recovery


A bear market is defined as a drop of at least 20%. This market drops a total of 40% over four months, stalls there for a third of the year, and climbs back to previous highs by the end of the year.

As you can see in the chart and graph below, the lower the market drops, the higher the end-of-year value you get for each $10,000 investment.

At the market trough, every $10,000 invested buys 167 shares, whereas at the beginning and end of the year, you only received 100 shares for that same $10,000.

The net result is a purchase of 1,625 shares and a final value of $162,460 for your $120,000 total investment. The market rewarded you for keeping the faith with an extra $42,460.

Note that all the market did was recover its losses. It’s not actually up at all at the end of the year as compared to the start, but you end up with 35% more money than you invested by the time the year comes to a close.

Wise guys will point out that a 40% drop requires a 67% rise to get back to even. Or that a 50% drop requires a 100% gain to fully rebound. Yes, that’s how percentages work. It’s also true that a 4,000 point drop requires a 4,000 point gain to get back to even.







Market Three: The Bull Market Becomes a Bear


In our third hypothetical market, things look really good to kick off the year, the market remains high throughout the summer, but it takes back its gains to begin a long, dark winter.

As in the other two scenarios, we end the year where we started, with a total market value of 10,000.

In this scenario, our $10,000 doesn’t go as far, purchasing only 71 shares when the market peaks throughout the summer.

As the market comes back down to earth, we’re getting 100 shares with our $10,000 by December, but the total value of our investment portfolio at the end of the year is $98,805.

Buying high, our losses mount, and we’re down over $21,000 by the end of the year. Compare that to the better than $42,000 gain. Which market would you rather invest in? That’s the $64,000 question, and the answer is clear.






What Not to Do in  a Bear Market


Loss aversion is powerful. We don’t like losing money, and when we see our investments lose value rapidly, as they did to the tune of over 35% in a few weeks from late February to mid-March of 2020, it can be really difficult to stay the course. Once again, people are questioning whether it’s a good idea to invest in stocks.

How do people respond?

Some stop investing. They want to wait until the dust settles. If you do that, you won’t be buying “stocks on sale” at a discount, and I doubt you’ll start investing when the market is at the trough (which can only be seen in hindsight) and fear is at its highest. This can be a costly mistake.

Some try market timing. The goal is to sell high and buy low. Most who try to time the market fail.

If you’re going to park some money on the side, I highly suggest having a pre-determined plan to get back into the market at certain levels.  Account for both the possibility of a further decline and the possibility that your timing was unfortunate and you sold at the bottom.

I’m not advocating for the approach at all, but based on posts in my fatFIRE (for everyone) and Physicians on FIRE (MD, DO only) Facebook groups, I can see that people are sitting on cash, unsure of what to do, and losing money to inflation while indecisive. If that’s you, be methodical about your approach to reinvesting or you’ll be making an emotion-based decision with your money every day.

It can be difficult not to market-time in some fashion. A “friend of mine,” let’s call him FoP, attempted to tax loss harvest from a mutual fund to an ETF when the market was hit a new low on 3/23/2020. By the time the markets opened up the next day, the ETF had shot up 5%. FoP sat on cash for months waiting for his limit order to be filled for the purchase of an international ETF at the equivalent price he sold the mutual fund at, eventually opting to invest that money in a passive real estate fund and a promising startup.

Don’t decide that now is the time to alter your asset allocation. If you realize that your risk tolerance is not as high as you thought it was, make a change after the market correction has passed and a new bull market is beginning. Switching to a portfolio with a higher allocation to bonds in the middle of a bear market only locks in some of those stock losses.


Don’t Look Back in Anger


In January and February of 2020, it became clear that the novel coronavirus epidemic that began in China was on its way to becoming a worldwide pandemic.

Frankly, I was really surprised that the stock market was continuing to rise in spite of this ominous threat. That information was baked in to the current valuations, I figured, and if this pending pandemic was going to cause major market disruptions, it would have done so by then. Right?


I’ve never acted on hunches before, and I wasn’t about to start then. Looking back, it seems so clear that the market was overdue for a fall and this pandemic would be the catalyst.

Of course, pundits have been talking about the market that’s about to plummet since about 2011. If you had acted then and sold stocks, you would have missed out more than doubling your money, even factoring in the 2020 bear market and the one that may be brewing in 2022.

It always looks so easy to look at past performance and just say “I had sold here, bought here, sold again here and then bought back in at this point, I’d be rich now!” The problem is, as Vagabond MD says as he recounts his first bear market, “nobody rings a bell at the bottom.”


The Role of a Written Investment Plan


You’ve seen how you can benefit from investing in a bear market. The only requirements are that the market bounces back eventually, as it has done in 100% of the 20-some bear markets this country has seen over the last century, and that you continue to invest through thick and thin.

Times like these are a wonderful time to refer to your written investment plan. Don’t stray from it. If you don’t have one yet, now would be a great time to write one out.

It doesn’t have to be complicated. It can start with a desired asset allocation and a monthly investment amount on a post-it note. You can expand upon it from there.

Here’s my investor policy statement, which I update about once per year. As you can see, it’s due for an update.

Having that written plan can help keep you from wavering when times get tough.


Recovery From the 2020 Bear Market


Although dire predictions were being made in March of 2020, we saw a swift V-shaped recovery. That is, a sharp drop followed by a return to previous highs in a matter of months, and the market rally continued on right into 2021. $1 invested in the S&P 500 in January of 2020 would be worth $1.27, and $1 invested in March of 2020 would have grown to $1.56 by April, 2020.

I once described the Great recession and recovery as a Nike Swoosh, a sort of U-shaped recovery that took years. We see a similar pattern over a much shorter timeframe if we look at 2020 and the first part of 2021.


thriving in a nike swoosh market


I am thankful that I stayed the course throughout the two biggest shockwaves to the stock market in the last 20 years. Bear markets can be frightening, but investing through them can also be very rewarding. As the bear looks to be coming out of hibernation in the spring of 2022, I will continue to stay the course.



How have you been investing in this bear market? Did you learn any lessons from prior bear markets?


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36 thoughts on “Building Wealth in a Bear Market”

  1. Pingback: 7 Lessons Learned During The Coronavirus Pandemic - Debt-Free Doctor
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  3. Pingback: 5 Market Crashes, 9 Lessons On Risk Tolerance. – Physician In Numbers
  4. PoF-My wife just started self employment as a 1099er. You mentioned you wish you would have opened a solo 401k vice SEP IRA, what made you say that. Curious as we are deciding now which one she should open.

    • A SEP IRA prevents you from doing the backdoor Roth. A solo 401(k) does not. Also, you can make the max contribution to a solo 401(k) with a smaller income than it takes with a SEP IRA because you can make both employER and employEE contributions.


      • How certain are you of that? I have a backdoor roth and a small business/side gig. My CPA told me to open a SEP IRA to decrease the amount of tax owed even though he knows I have a backdoor roth. He told me the business didn’t make enough to open a solo 401k.

        • You both know that you won’t be able to do the backdoor Roth anymore with a SEP IRA, and I’m not aware of any minimum revenue required to open a solo 401(k). I opened mine with Etrade, and there were no fees or minimums.

  5. You and I went through an eerily similar trajectory. Back in the early 2000’s, a financial advisor asked me how much of a drop in my portfolio am I comfortable with? I told him 50%, and he rolled his eyes. Lol

    I was extremely aggressive during my first 20 years of investing. I’m talking VTI, VGT, MGK, Tech’s, High growth. I had nothing to lose.

    When 2008 hit, I poured everything I had into the stock market. I followed Warren Buffett’s when there’s blood in the streets….

    When 2020 hit, I continued to put money into the stock market, again following Buffet’s advice.

    These two crashes have propelled and created significant positive results for my portfolio.

    So, for the naysayers in this 2022 crash, keep feeding it. Buy even more, if you can. Tune out the noise. You won’t regret it when you hit FI sooner than you think.

    • Nice man! I myself had just gotten financially literate right before the coronabear, and I loved the crash but it was too wimpy! I am hoping this time that the market will crash by 99%!! to an inch of it’s life!!! and then maybe stay there Japan style until 5 years before I retire, and then when I have my retirement party that will be the start of the longest secular bull run the world has ever seen with valuations slowly reaching CAPE’s of 150 throughout my 30 year retirement!

      And then when I am in the grave, I’ll miss the crash back down. This is what I pray to the investing gods 🙂

  6. I am a buy and hold guy. But i have always wondered how a sell when trailing P/E is over 25 and buy when P/E is less than (for example) 15 would work out. Seems to me that is a logical way to time the market.

    • You could back test that theory and compare to a regular buying schedule. Portfolio Charts might be of help if that’s an endeavor you truly want to undertake. I have a hunch that you’d miss out on a lot of gains while sitting in cash, but I’d be curious to see what results you get if you run the numbers.


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  15. Interesting charts. Timely post because it’s unclear whether we are now Scenario #2 or #3.

    However, I’m not sure what the recommendation is because if you keep investing regularly over time you will encounter all of the scenarios you detailed. Unless of course, you time the market, which is rarely recommended.

    Perhaps you are just trying to make a point to resassure and keep DCA investing during a bear market? And what do you do if you are newly retired and have less to invest during these bear markets, short of changing up allocations and moving bonds/cash into stock.

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  21. When is a good time to and how would you tax loss harvest to consolidate similar ETFs, such as VOO, VYM, VTI, SPY, VFIAX, SPHD?
    At a 10%-30% loss of each now

  22. Hi all, great post as usual! In your example, an investor who keeps 100% in stocks will (obviously) save 100% into stocks. Every month. But many of us have slightly lower stock allocations. One problem I’ve thought about for years is how to rebalance. After all, during the 2010’s, the market was going up most months.
    After a few years of saving, a FIRE-style person often has a reasonable amount invested, and fluctuations in any single month easily overwhelm their monthly and even quarterly contributions.
    Loosely speaking, my approach has been to rebalance into a band, e.g., keep stocks between 75% and 80%. When I’m above the bottom of the band, new investments go into conservative assets. And when stocks dip, I make sure to maintain the bottom of the band by frequently buying. I don’t buy unless I’m at the bottom of the band, which means that I only buy during dips. In some extreme cases I breached the top of my band (early 2018 and early 2020) and sold a bit. Hope this is helpful to those who don’t want a 100%-equities approach.

    • That’s one possible solution to the pandemic, assuming it’s effective, offers long-lasting immunity, and is widely implemented.

      A lot of damage can be done to businesses and certain industries in the 12 to 18+ months between now and then, assuming a vaccine can be successfully developed. The economic recovery will be on a different time course. And the stock market will rise and fall based on what’s anticipated.


  23. Perfect timing for this article! My parents went behind my back and STOPPED their monthly automated investments I had previously set up for them on the Vanguard site. Hopefully your “Market #2” scenario will encourage them to get back into the market.

    Loss Aversion is so darn hard to get over. You’re right, being disciplined is the key.

    • Amazing Article. Running the 3 scenarios really helped me understand the huge difference a dip makes. And how good markets can actually fool you into a sense of warmth and comfort when there is really no gain to be had. Too bad for the lost decade…good thing you stayed the course though.

      Like they say…no pain, no gain.

      • Thanks, SSC.

        That’s the thing about a “lost decade,” though. If you invest throughout a decade where the market drops and recovers, you’ll make a good amount of money on those investments.

        Of course, the opposite is true of a rise followed by a fall.


    • Oh, that’s a bummer, and clearly the opposite of what a disciplined investor ought to be doing right now.

      Could it drop further? Sure, but we won’t know until after it happens (if it does at all). And how likely are they to resume those automated investments if the market has dropped 40% or more? Not likely, I’m guessing. I hope you can provide some guidance.



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