Bull and bear markets are a fact of life.
The S&P 500 is in an official bear market – defined as a drop of 20% from the previous high.
Not only are the tech-laden Nasdaq and the small cap Russell 2000 down over 20%. The average U.S. stock is down well over 30%.
How you handle tough environments like this one can make or break your long-term investment success.
In particular, you need to avoid the five biggest bear market mistakes…
No. 1: Acting emotionally rather than rationally.
When stocks take a serious slide, most investors feel some combination of fear, anxiety and regret. As a result, they feel compelled to “do something” to stop the pain.
Unfortunately, that something – sell! – is generally the wrong thing. They’re acting on emotion rather than reason. Yet they fool themselves by rationalizing that the move to the sidelines is temporary and they’ll get back in when the outlook improves.
News flash: The stock market is a leading indicator not a lagging one. Share prices start trending higher before the good news actually arrives. Those who exit the train risk getting left at the station.
Translation: You can’t profit from a market rebound unless you’re actually in it.
No. 2: Believing that a stock is a “Buy” merely because it has fallen in price.
When a stock goes down, we know only one thing for sure: It’s cheaper than it used to be.
It doesn’t mean that it is necessarily “undervalued” or “a great investment” or “ripe for a rebound.” After all, even a significant drop may only take a stock from “wildly overvalued” to “significantly overvalued.”
Price alone does not make a stock undervalued. It very much depends on the outlook for the business.
As Warren Buffett famously warned, “Price is what you pay. Value is what you get.”
No. 3: Trying to pick the bottom.
Some investors convince themselves that they will put fresh money to work in a bear market, just “not yet.”
But trying to pick the bottom is a mistake. Whether we’re in a bull market, a bear market or something in between, stocks can always go lower. No one ever sees the bottom except in hindsight.
So if you’re attracted to a healthy, growing business at a bargain price, don’t get caught stealing in slow motion. Take at least a half position. If it goes lower, you can add to it. And if it shoots higher, at least you got your foot in the door.
No. 4: Expecting the market to snap back immediately.
This is a particular problem for new investors. After all, the COVID-19 crash in the first quarter of 2020 was both the fastest bear market – lasting just 33 days – and the quickest new bull market, taking less than five weeks.
Bank of America looked at 19 U.S. bear markets over the past 140 years and found that the average lasted 289 days. That means if this bear market is “average,” we’re only halfway through it.
But stocks can rise 19% before a new bull market is official. We might be at or near the bottom of this one. Or not. So think in terms of a holding period of months or years not days or weeks.
No. 5: Forgetting history.
Look at a chart like the one below, which shows over a century of stock market history. Where were the best buying opportunities? Right, at times like now.
Looking back at every bear market of the past, the worst investors sold at the bottom. The mediocre investors sat on their hands and did nothing. And the best investors? They took advantage of the downturn and bought stocks at attractive prices or – at the very least – reinvested dividends while the market was down.
To determine your best course of action today, imagine yourself a few years from now asking yourself a simple question.
“In 2022, was I a lousy investor, a mediocre investor… or one of the best?”
Being the best means doing what’s right. Even – or especially – when it doesn’t feel like it.
Good investing,
— Alex
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Source: Wealthy Retirement