Back in September I wrote a post titled Bear Market Coming? Bear Market Here? in which I talked about taking defensive action in the face of what might have been the start of the next bear market. As of now the S&P 500 is down about 11% since a high hit in May, a little better than that factoring in the dividends.

That sort of action meets criteria for what I believe contributes to a bear market. Bear markets tend to start slowly over a period of quite a few months giving people plenty of time to get out before the serious declines start. Of course this may not be the start of a bear market, I could be wrong but without knowing the future this sort of thing is what process and discipline are all about.

The September post talks about cash raised. Being a little suspicious of the market I did not reequitize that cash when the S&P 500 index went back above its 200 day moving average, and by the time this post clears compliance I will have taken a little more defensive action.

I don’t believe in selling everything out in the face of a bear market because 100% cash is a very big bet. My objective is to avoid the full brunt of a large decline not miss it altogether because attempting to miss a bear market entirely carries too much risk in the likelihood of being wrong about the timing. If the market rockets higher from here a defensively positioned portfolio will still have some upcapture whereas 100% cash will not.

If you’re down less than the market up to this point that is a win, and if it is a new bear market you have time to take defensive action if, I repeat, if that is part of your strategy. Plenty of investors’ strategy is to hold on no matter what and that is valid provided those investors actually do it.

The reason holding on no matter what (assuming suitable asset allocation) is valid is that whenever the next bear market comes, it will at some point end, 18-24 months is a common duration, and then the next bull market starts. The reason to mention holding on no matter what is that it is likely that people who attempt to take defensive action will miss a bear market over their investing lifetime, remember this is about attempting to avoid the full brunt, there can be no guarantees.