The stock market is not just for the wealthy. Sometimes we think that in order to “qualify” as an investor, we must have some sort of iron-clad portfolio that produces huge income, dividends, and growth to be included in the rare air of the wealthy. While that may be true of the Warren Buffetts of the world, in reality, the average guy should be the backbone of Wall Street. So when times are good and the market is busting through the roof, you feel empowered and completely engaged. But what about when it starts to tank (and it does that every so often in its normal cycle of ups and downs)? What happens to your enthusiasm when it’s a bear market? Can you win investing in a bear market?
Who Are You?
The me and you of us invest and what was once just for the rich is now solidly entrenched as a mainstream way to add and build wealth, and that’s for almost everyone.
Even if you are just beginning your climb towards building wealth and starting out your career, you at the very least think about investing. It may be just beginning at work in your company stock plan or in your own IRA account as a start.
The truth is that you can’t help but hear about what’s going on in the markets. The ways to build your personal wealth and financial independence no longer just rely on getting that great job with great pay and then magically receiving your Social Security checks 40 or so years later when you retire, sitting by the pool sipping a margarita. If that ever really was a thing, in the 21st century it isn’t. That’s why you need to invest and that means getting started early and not being frightened when the bear takes over and the bull (the “through the roof guy”) takes a vacation!
What Exactly Is a Bear Market?
A bear market is typically defined as a 20% drop from recent highs. The most common usage refers to the S&P 500’s performance, but the term bear market can be used to refer to any stock index, or to an individual stock that has fallen 20% or more from recent highs. For example, we could say that the NASDAQ Composite plunged into a bear market during the bursting of the dot-com bubble in 1999 and 2000, or that a particular company reports poor earnings and its stock drops by 30%.
The terms bear market and stock market correction are often confused. They refer to two different magnitudes of negative performance. A correction occurs when stocks fall by 10% or more from recent highs, and a correction can be upgraded to a bear market once the 20% threshold is met.
Why Do Bear Markets Happen?
The 60s rock band Blood, Sweat and Tears said it best back then: “What goes up must come down, Spinning Wheel got to go round” and the stock market is that spinning wheel! Besides that they do go round and round, fear and uncertainty are the most common reasons why the markets change to bear status.
It’s a result these days of the instantaneous news cycles to which we are all exposed. It might be related to COVID-19 or what’s happening right now with the Ukraine crisis and the Russian invasion, but you can bet that any unpleasant or disastrous news will affect the stock markets not only here, but around the world. You need to pay attention to these things, but you can’t “overreact” to every nuance of them.
The Bear vs. the Bull
Bulls and bears are opposites. Bull markets show elevated consumer confidence, low unemployment, and strong economic growth. The bull makes you want to invest, more and more. The bear creates fear and makes many run for the hills. You can run, but you can’t hide as is said, and sometimes running can lead to disaster.
How Do You Invest in a Bear Market?
No one enjoys watching the value of their portfolio go down. But even in a down time, there are still opportunities to put money to work for the long run. Why? That’s because in a bear market stocks are trading at a discount.
With that in mind, here are some rules you can use for investing in a bear market the right way.
1. Think long term
One of the worst things you can do in a bear market is to make a knee-jerk reaction to market movements.
The reason why the average investor significantly underperforms the overall stock market in the long run is because they are moving in and out of stock positions way too quickly.
Here’s what happens when the bear markets hit. When stocks plunge and seem as if they’ll keep falling forever, it’s our instinct to sell before things get even worse. When bull markets happen and stocks keep reaching new highs, we want to put our money in because of FOMO, the fear of missing out, on potentially huge gains.
The main goal of investing is to buy low and sell high, but by reacting emotionally to wide market swings, you’re literally doing the opposite. Invest in stocks that you want to own for the long run, and don’t sell them simply because their prices went down in a bear market.
You often hear about investors who try to time their investments with the market trends. Don’t do that.
Trying to time the market is generally a losing battle. Buy stocks because you want to own the business for the long term, even if the share price goes down a little more after you buy.
This is important to know when it comes to investing in a bear environment. Build your stock positions over up time.
Instead of trying to time the bottom and throwing all your money in at once, a better strategy during a bear market is to build your stock positions gradually over time, even if you think prices are as low as they’re ever going to get. This way, if you’re wrong and the stock continues to fall, you’ll be able to take advantage of the new lower prices instead of sitting on the sidelines grumbling that you paid too much and missed out on the better deal. That’s the benefit of dollar cost averaging. It’s sort of like the old phrase, keep your powder dry and have some left in your pouch for a real opportunity.
2. Focus on quality
When bear markets hit, it’s true that companies often go out of business. That means when the economy goes bad, companies that are overleveraged or don’t have any real competitive advantages tend to get hit the hardest. High-quality companies tend to outperform. During uncertain times, it’s important to focus on companies with rock-solid balance sheets and clear, durable competitive advantages.
3. Invest in what you know, like, use, and think will be even more so in the future
Since, as the average person, you do not have the inside tech knowledge of a particular stock or industries, use your smarts and some research to decide where you can invest. If you love Coke, it’s not going anyplace soon so invest in it.
You don’t have to be a savant to know that the future looks bright for electric vehicles and they may be the next big investment opportunity over the next 10 years. See where I am heading here?
I wish that I knew then what I know now, and I’m not talking about which stocks I should have invested in 40 years ago. I didn’t invest at all back then. Big mistake. I’m now a believer, but my time horizon isn’t as hot when it comes to making millions like Warren did. But it isn’t too late to create another solid income stream.
If you are younger than I am, investing is great and now is a perfect time to start. Even the bears would agree because they know this: The bulls are waiting in the wings and opportunity is out there if you practice the three tips I outlined here.
One word of caution: know your risk tolerance. Don’t overdo risk and throw money you don’t have or can’t afford to risk in investments. That doesn’t work.
Are you invested? Do you have fears and doubts? Do you invest through your employer? What do you want to know that will make you a better investor now and for the future? Is building your wealth through investing what you want to do?