Reason Number Six for Loving the Bear Market

Bear markets pu the Kibosh on Silly Bulls and Make a Good ETF more obvious.

Funny words are fun words. I like words like “kibosh.” The etymology of the word is elusive. Apparently, Charles Dickens used the word in 1836. I seem to recall my mom using the word too. It sounds Yiddish, but that is not supported by my quick research. Kibosh means to end or stop something. For example, “My mom put the kibosh on our crazy misbehavior by saying, ‘wait until your father comes home.’”

When it comes to the stock market, bear markets put the kibosh on crazy bull markets. In fact, in a MarketWatch article “3 benefits of a bear market”, by John Lim, Mr. Lim says that bear markets are a gift. He said, “… bear markets put the kibosh on bull market foolishness. Not only do higher stock prices make investing riskier, but also the resulting euphoria sucks more people and more money into the market at the worst possible time.”

The Best ETFs Become More Obvious

When the market is charging upwards, some ETFs don’t run up as fast. I would argue this reality is a mistake of those with a short-term perspective. As a long-term investor, I want to see long-term results. Those long-term results should be fueled by both dividend growth and rational performance over a five-year or ten-year timeline. Much of the last bull market was chasing non-dividend, high “growth” investments like AMZN, TSLA, and GOOGL.

Let Me Illustrate with My Favorite ETFs

If you look at the WSJ (Wall Street Journal) you can find the YTD performance of all of the major indexes. I did that on October 11. The images I captured are shown here. Notice that all of the major indexes are down at least 20%. The NASDAQ really stinks. So does the semiconductor sector. But all is not lost. Another more fun example comes from a website called Statmuse.

DOW JONES Industrial Average YTD 2022 and S&P 500 Index YTD 2022
The NASDAQ 100 is the home of many growth and technology stocks. Feel the pain!
STATMUSE YTD Returns on DOW, S&P 500, Russell 3000 and the NASDAQ

Now consider an ETF like VYM. VYM is down 14.1% as of October 12. SCHD is down 16.4%. DGRO is down 19.4%. In each case, the ETFs have lost less value than the major indexes. Furthermore, each of these ETFs have been paying decent dividends supported by company profits.

It is true that I give up some growth with my dividend-growth strategy. However, in retirement, growth cannot pay for groceries. Well, it cannot pay for groceries unless you sell an asset. The thing you don’t want to do in a bear market is sell when the market is down 20-50%. Value stocks, on the other hand, often provide cash at least every quarter.

Assets Under Management (AUM)

One Seeking Alpha author suggested ETF PEY for consideration. This ETF is the “Invesco Exchange-Traded Fund Trust – Invesco High Yield Equity Dividend Achievers ETF.” I looked at a couple of the top ten investments in this ETF and concluded they are chasing dividend with some fairly high-risk companies. Furthermore, PEY is a fairly small ETF compared to more popular dividend ETFs. Also always look at the expense ratio. PEY is overcharging for their small selection of 52 companies.

Be aware of AUM and the Number of Holdings in your ETFs or mutual funds.

Seeking Alpha ETF Grades

Would you like to save $200 and make a couple of $1,000 mistakes? I would rather subscribe to Seeking Alpha and avoid a host of $1,000+ mistakes. The beauty of the ETF grades is that they can quickly eliminate some of the worst stocks and ETFs. PEY is OK, but DDIV is simply awful. However, my four “favorites” (VYM, SCHD, DGRO, and DVY) all have decent grades.

Seeking Alpha clears the clutter from investment choices.

Dividends, Dividend Growth and Ten-Year Performance

Look at both Dividends and Performance when buying shares of an ETF.

At the moment, SCHD is number one purely from a dividend yield and 10-Year Price Performance vantage. Notice especially the YTD performance for my favorite ETFs. If you were 100% in these four ETFs, your retirement investments would not have suffered as much as the index-chasing funds.

I love the bear because the bear confirms what I would expect. Quality ETFs are better for weathering a bear market. You might wonder why this is. There are at least three reasons. 1) Retirees who hold these investments for income don’t care if the price of the investment drops marginally in a bear market. They are getting paid every quarter. 2) Day-traders don’t trade ETFs for the most part, at least not ETFs like VYM. 3) Dividend-growth ETFs aren’t exposed to the supercharged stocks that can take a beating in a bear market.

LOVING THE BEAR CONCLUSION

If you invest in growth stocks, growth mutual funds, and growth ETFs, expect more pain in bear markets. If you don’t like pain, then consider finding investments that are more value-oriented. I love the bear market because the bear markets expose the real value from the bull market that will get the kibosh sooner or later.

Here are our actual performance results in graph format at Fidelity Investments from 2003-2022 YTD. Number one is if I kept everything in cash. Number two shows the potential impact of a bear market. Number three shows the current trend, including the 2022 bear market. Then look at the dividend graph and ask yourself if your advisor is giving you good advice. Is your income growing in a bear market?

Don’t live in fear during a bear market.
You can have a growing income with very little work. Pick dividend growth ETFs.