Your Wallet vs. a Bear Market: How to Get to the Top
Investing in stocks is not for the faint of heart. Unlike other asset classes such as real estate where investors rarely experience extreme volatility, the stock market tends to test the emotional stability of its participants.
And 2022 is the latest episode in this saga.
with the Standard & Poor’s 500 It’s down as much as 23% year-to-date, and its high-tech cousin, Nasdaq CompositeAnd, even worse, there are investors who will likely leave the market for good in the coming weeks (if they haven’t already). In fact, a recent study by Allianz Life found that 43% of investors are too concerned to buy stocks at current levels.
But if the goal is to buy low and sell high, why do investors hesitate to buy when stocks are cheap?
This is the investor’s dilemma. We all say we’ll buy when the market goes down, however when opportunity arises, we find it hard to pull the trigger. Here are three reminders to help you stay on track so your portfolio can come out of this bear market on top.
Net Buyers of Stock Profit in the Long Term
One of the simplest reminders to calm one’s nerves during a market downturn is that the market has never failed to recover from past crashes.
Consider the chart below that tracks the overall returns of the S&P 500 and Nasdaq as well as all-time highs over the past several decades.
This diagram may be a bit confusing at first glance, but it’s actually quite simple. The straight horizontal lines represent the time period between the all-time highs in both indicators.
There are two important takeaways:
- Both indices recovered from each crash to regain their all-time highs and rise even higher.
- There were extended periods of time for both indicators before those all-time highs recovered.
The second takeaway is not so difficult, but it should actually be the biggest incentive to continue investing through bear markets. If you plan to wait for the market to recover to start investing, just know that you may wait more than seven years depending on the longest recovery period for the S&P 500.
Even worse, tech investors who exited the market after the dotcom bubble lost nearly 300% of Nasdaq’s gains over the following 15 years:
Finally, here are some other stats to support today’s remaining net-share buyers:
- Half of the best market trading days are during bear markets.
- Midterm years tend to be tough for stocks, but the average gain in the S&P 500 the following year is 32% (according to LPL Research).
Buying what you know gives you an advantage
When the market puts me down, I often turn to the words of legendary mutual fund manager Peter Lynch.
He said the following about using your unique advantage when buying shares:
People have incredible edges and throw them away […] If you’ve been in the auto industry—let’s say you’ve been a car dealer for the past 10 years—you’ve seen Chrysler, come with the pickup truck. If you’re a Buick dealer, Toyota dealer, Honda dealer, you’ve seen a Chrysler dealership full of people. You could have made 10 times more money on Chrysler a year after the minivan came out.
Lynch’s point is instead of chasing hot stocks, research companies in your area of expertise.
People are more willing to pile money into industries they know nothing about because the rest of the market does, even when there are huge opportunities in their own areas of expertise.
So, if you are intimidated by putting money in the market now, consider looking at stocks in which you have a unique advantage. Honestly, this is good advice in any market cycle, but it can give you the conviction you need to keep investing during downturns.
Put on your contrasting hat
To succeed in investing, it can pay off by looking at the market in the opposite way. And in a bear market, there are huge opportunities to be a contrarian.
Right now, many investors are kicking out almost all tech companies. The market collectively says that because inflation is higher and interest rates are rising, technological growth will stall for the foreseeable future.
A large part of this is a muscular memory from the collapse of the Internet when hundreds of companies announced weak-to-non-existent core business models. But many of the tech companies that sold out in the past year have been very profitable and are moving society forward in the digital world.
I doubt that higher interest rates will block this progress significantly, and investors who buy high-quality growth companies cheaply will likely reap the rewards in the future.