Research shows that the average down market lasts three to four months. However, it is not the short-lived down market periods that active investors should worry about, but the occasional longer and sustained down market periods, such as the one we are now experiencing. All ‘long’ strategies, whether they are Buy & Hold or more active, will go into drawdown during sustained bear market periods. The perennial active and passive investment dilemma is that nobody really knows when the prolonged bear period will occur or how long it will last. However most investors live in fear of such a situation and it is this fear that causes investors to become inconsistent in their actions during the down period and the ensuing positive market periods.
Why is there fear of such market periods? Because people fear losing. Is it a comfortable feeling living in fear of such market periods? Probably not. Would investment life be more liberating if such fears could be overcome? Probably so.
So how can we overcome the fear of losing? If this fear can be mastered, active investment will become much simpler and more enjoyable.
Most try to handle it by looking for a reason for their loss, hence analysing charts and indicators. However there will always be loss trades. So fear is impossible to analyse away unless a perfect solution can be found in which there is never any loss or drawdown. Such analysis is an infinite task that has a limitless path. If it is impossible to achieve a lossless environment through analysis in order to overcome the fear of loss, then another way has to be found to overcome the fear.
You can achieve this by changing the way you think about the market, by learning to think from the market’s perspective as we have said before. Why do we need to think from the market’s perspective? Because understanding why and how the market moves makes us empathetic with the market, we become one with the market’s movements, we become an insider looking out rather than being an outsider looking in. Markets do move up and down, not just up. An obvious statement we could assume. So why do people have an eternal expectation of upward movement only and become despondent when downward price movement prevails?
Another way to think about the market is to accept that down periods are good for the market because they allow the market to catch its breath. Down periods provide the setup for new upward moves. Up periods, which bring profits, follow down periods. This is the law of polarity—everything has an equal but opposite polarity: there are ups and there are downs, there is hot and there is cold, there is good and there is bad, there is outside and there is inside, there is long and there is short, hate and love, pain and pleasure, win and loss, bitter and sweet, good shots and bad shots, etc. As an imperfect growing human being, in every endeavour we will experience positive and negative outcomes. This is the law of polarity.
In the context of the market down periods causes drawdown in portfolios and generate loss trades. All of these movements are a necessary part of the anatomy of the market. We must encourage ourselves to accept down markets rather than feel fear, despair, frustration and anger. We must learn to accept drawdown in our portfolios as a necessary occurrence of active investment. Whilst still tough, this is easier when using a proven system with a positive expectancy.