2018 gave us a December to remember, with the S&P 500 index losing 9% for the month, locking in the worst December performance since 1931.
From peak to the most recent bottom, the S&P 500 has fallen more than 20%, marking the first bear market since 2008-09. Now the bear market is here, are you prepared to deal with it?
This most recent drop has given us all a scare. Does the drop have you worried?
Did you prepare for the bear market beforehand?
Preparing for stock market drops prior to experiencing one, helps you digest results when it occurs. It doesn't change the fact that disciplined investing is difficult. And while you'll never be excited about stock market declines, you can be prepared.
On this episode, we clue you in on the tricks for surviving a bear market. You’ll learn what a bear market is, the questions people typically ask when the markets drop, how to prepare for a bear market, and how to recognize a bargain when you see one. The markets are always changing, are you ready for what’s ahead? Listen to this episode to help you weather the storms that bear markets bring.
In long and strong bull markets, overconfidence is plentiful as positive returns inflate our perception of our investing skill-sets. But when the markets drop, we are quick to question our investment strategy. People ask themselves:
We feel the need to act when we see our nest egg evaporating. The biggest question people ask is: what do I need to do to preserve my money? If you feel like you need to sell and go to cash then you could be taking to much risk. Risk tolerance can be thrown out the window when things are going well. It’s when things go south, you learn your true risk tolerance levels. A poor decision in a bear market can often take years or even decades to recover from. Listen to this episode to help you learn how to make the right decisions in a bear market.
A bear market occurs when there’s a drop of 20% in a particular stock market. This differs from a recession which is declared after there are 2 consecutive quarters of negative GDP. Many people think there must be a recession to have a bear market, but not every bear market results in a recession. However, they do tend to work together. There’s about a 50/50 chance of having a bear market coincide with a recession. As painful, as bear markets can feel, they do happen much quicker than bull markets. The average length of your typical bear market is 1.4 years, contrasted with an average bull market at 4.5 years.
Bear markets can be scary to watch and unfortunately, the news channels cover them constantly. People pay more attention to bear markets since they are sensationalized by the news media. The most important thing to remember is to follow your strategy. If you feel like you need to get out immediately and go to cash then you are likely taking too much risk. Unfortunately, we can’t follow our intellect and instinct when it comes to investing. Our instincts influence us to stop the bleeding and sell stocks to hold more cash. The problem with that strategy is big up days occur very close to big down days. So when volatility spikes, your time in the market matters than trying to time the market.
The silver lining of a bear market, is the buying opportunity they create. For many investors that are steadily saving in their investment accounts, bear markets present bargains for higher long-term returns. But how do you know the best time to invest more in stock? How do you ensure that you are not buying too early? Studies show the best strategy is to invest a lump sum upon receiving, as your average long-term returns are higher with stocks vs. other alternatives. Our emotions tell a different story. Catching a falling knife is a risky game. This is where personal circumstances matter most. What does your future income, spending and savings rates look like? When will you need your savings? Answering questions like these gives you a head start on the best choices for your life. Because “knowing” what will happen in the short-term is a fool’s game. Understanding the historical context can help, if it gives you the confidence to begin and stay invested through potential worsening conditions.
Warren Buffet once said, “widespread fear is your friend as an investor because it serves up bargain purchases. Personal fear is your enemy and it will also be unwarranted.”