Nobody has ever figured out how to stop bear markets. They arrive on their own schedule, they do not RSVP, and they never call ahead. What you can control is whether you are standing in the room when one walks in.
That is the whole trick, and it is less glamorous than it sounds. We do not predict the bear. We do not know the day it shows up any better than anyone else does, which is to say, not at all. What we do is watch the door. When the trend in a sector turns down and stays down, the rule quietly shows that slice of your money out the back, into cash, and lets it wait there until the coast is clear. No drama, no forecast, just a standing policy of not being in the room when things get ugly.
The record says the policy is worth keeping. In 2008 the market fell 55 percent. The rule held the strategy to about 15 percent. Run sector by sector through the Great Depression, the deepest hole in American market history, and it took roughly only a quarter of the market’s pain. And across every calendar year since 2000, the strategy has reduced losses.
John