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Bear Market Defense

Written by: Shirley Mueller

Article Overview: An entrepreneur asks, “Is there anything I can do to defend myself against lower investment returns when the market slumps?” Happily, the answer is yes.

Bear Market Defense

An entrepreneur asks, “Is there anything I can do to defend myself against lower investment returns when the market slumps?”

Happily, the answer is yes. First and foremost, control what you can, and one important factor here is expenses. This is because as the stock market goes down, costs take a bigger cut out of return. For example a 1.5% expense ratio from a 10% return leaves 8.5% left for the investor. But, 1.5% from a lower return, say 7%, leaves only 5.5%. Note that the expense ratio is the same, but because of the lower return in the second example, the investor puts much less in his/her pocket. Obviously, what you pay in expenses can make a big difference in your return, and even more so when the market is down.

How to figure what you paying in expenses:

• The average managed mutual fund expense ratio is 1.3%. Money management fees for a private investment advisor or equivalent usually run 1-2% and can be higher. Index funds charge much less, about 0.20%.

• Is there a load? If you are in a managed mutual fund, did you pay a load up front or will you be paying a load at the back end if you don’t keep the fund long enough? Either of these factors increases your total monetary outlay.

• What about 12b-1, a little recognized tacked on charge? If you are in a managed mutual fund, check to see if you are paying a continuing 12b-1 expense, the purpose of which is for the fund to market their product to obtain more clients. Although the yearly charge is small, often 0.25%, when it compounds over time, the debit from your return becomes substantial.


There are sophisticated cost calculators on the web that can help with the number crunching. One is from the Financial Industry Regulatory Authority (FINRA). It offers side by side expense ratio comparisons for mutual funds and exchange traded funds (ETF’s) including the effect of loads (share class designation).

Perhaps the extra expense would be alright if it was justified by better market returns, but statistics indicate this is not the case. Only 20% of managed mutual funds outperform their relevant index in any one year, and over time the results are even poorer. Is there any reason to think that private money managers do any better?

As Warren Buffet says, “Chains of habit are too light to be felt until they are too heavy to be broken.” This applies to investors who ignore fees when the market is up, but can’t afford to ignore them when the market is down. It is the foolish investor who doesn’t pay attention to one of the few things he/she can control in any market whether it is down or up.

Adapted from Bear Market Defense published by Physician’s Financial News Live: July 9, 2008.

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Article Tags: 12b 1, class designation, cost calculators, entrepreneur, exchange traded funds, financial industry regulatory authority, index funds, investment advisor, investment returns, management fees, money management, mutual fund expense ratio, mutual funds, number crunching, outlay, private investment, ratio comparisons, share class, slumps, stock market



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