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If you’re under the age of 35, chances are you have never personally experienced a bear market where stock values go down by 20% or more from their highs.  That’s because there hasn’t been a bear market since the 40% collapse of 2008-2009.  In fact, the current bull market has been going for 12.6 years as of this writing in September 2021. 

If you’ve never experienced a bear market, it’s terrifying.  All the bravado and assurances from your advisors turns into excuses and pleas to ‘ride it out’ – ‘it will come back’ they say – which of course is proof positive that they never had any real information to back up their recommendations in the first place.  But I digress.

Fortunately, markets do come back – and hopefully they do so at a stage in life that doesn’t trap you into permanent loss absorption.  But chronological roulette is no way to live or invest – and the gut-wrenching waiting period is emotionally excruciating.  Some who thought they had the stomach to ‘ride it out’ don’t – and pull the plug to salvage the precious few dollars that are leftover.

In fact, if you’re under 35 and have been saving and investing over the last 12.6 years, – you know nothing but smooth sailing – with an occasional blip that, while attention-getting, has never lasted long enough to stir any real fear or panic.  Even those over 35 have enjoyed that same bull run – which pushes the memories of past bear markets farther into the recesses of our minds, and bleaches out recollections of the fear, anxiety, and stress we lived through.   

But history tells us the average bull market lasts 8.9 years.  Were 12.6 into the current one.  It doesn’t take a genius to know that we’re much closer to the end of this bull run than the beginning.  And that presents us with a dilemma.  How do we prepare for the day this one is over?  Is there a way to:

  • Lock in the gains and good fortune of the last 12.6 years,
  • While immunizing our money from any calamity that may come our way, and
  •  Continue to participate in market gains the minute they resume

That would take on heck-of-a crystal ball – and unfortunately, we all know that crystal balls are things conjured up by fairy tales and modern-day Charlatans (sometimes known as investment advisors).  But a look into the very real crystal ball of history may give us some clues. 

Over the last 150 years of the stock market (1870 – 2020), 54 years have tallied losses, while the remaining 96 have posted gains.  That tells us that roughly 1 in 3 years is a loss.  Despite the craziness of the ups and downs, $1 invested in 1870 would be worth $845.57 today – not too shabby.  But get this – if our 1870 investor had the foresight to sit on the sidelines during the 54 loss years, that $1 would have grown to a staggering $1,720,150. 

Holy loss-control Batman – maybe we’re onto something!

Unfortunately, we’re still stuck.  Because neither crystal balls, tarot cards, or Ouija boards can tell us when those loss years are coming. 

But what if we could make a bargain with the market?  What if there was a way we could invest money and lock out the possibility of losses, and in exchange, we gave up the peaks of the market in years where gains exceeded – say – 10%? 

In other words, we’d never take a loss; we could earn up to 10% based on the market’s performance; but we’d never earn more than 10% because we’d give up the topside of those really big years as the price we’d pay for the loss protection in the down years. 

That wouldn’t get our dollar all the way to $1.7 million, but it would take us from $845.17 absorbing all the losses and realizing all the gains – to $1,970.01.  That’s right – by simply eliminating losses over the last 150 years, even if that mean giving up every single gain that exceeded 10% – our hypothetical investor would have 233% more money.  The lesson?

It’s far more important to eliminate losses – than it is to hit homeruns by capturing 100% of the gains in the really big years.

There are two ways to get that kind of outcome.  Buy puts on the market’s downside and sell calls on the market gains over 10%.  If the proceeds from call sales were sufficient to fund the cost of the puts purchased – jackpot!

If that paragraph flew over your head like a SpaceX rocket – it may not be the best way for you to achieve loss protection.  Thankfully, for we non-rocket-scientists – there’s a way to get exactly that outcome, perhaps even a bit better.  It’s through insurance companies – who are in the business of taking on risks we don’t want to take on, and they do it on such massive scale that it’s quite affordable for those of us who need to pinch pennies. 

Be aware and conscious that there is an end to this bull run that may not be far off in the future.  Be aware that there are ways to lock in the gains of the last 12+ years.  And be aware that there is a way to lock out the possibility of future losses – while capturing sufficient gains to make you a winner in the saving and investing game – leaving the stress and anxiety to others.