Not long ago, the stock market was at all-time highs. Investors’ bullish sentiment made it clear that many investors were not ready to handle a downturn or a full-blown bear market. After euphoric months of record highs seemingly every day, investors have forgotten how to weather a market that is going down. At the end, when the markets start to tank, investors raise the question if they should get out. But at the end of the day, it depends on your tolerance for risk, if you want to get out.
Here are 3 questions that will help you to deal with our new bear market and keep your cool in downturns like the one we’re seeing now.
1. When do you need the money that’s invested in the market?
If you don’t need the money that’s invested in stocks for another 10 years, then a bear market shouldn’t be much of a concern. The stock market almost always goes up over a 10-year period.
But if you need the funds that are invested in stocks within the next three years, take them out now because you can’t afford to be exposed to short-term risks. Anything can happen in the market over 2-3 years. So, sell your stocks that cover your capital needs within the next 3 years.
2. Do you have trailing stops?
Trailing stops will protect your gains and capital if things go wrong in the market. The best aspect of a trailing stop is that it removes emotion from your decision to sell. Trading with emotion is dangerous and can cost you a lot of money. A stop will protect your profits in a rising market and keep your losses small during a correction or bear market. The key is to honour your stop and not remove it when the stock starts getting close to the stop price. If you use a trailing stop, you’ll get out when things start getting messy and have plenty of capital to put back into the market when you’re ready.
3. Can you handle a downturn emotionally?
If a sell-off in the market scares you and the answers to the first 2 questions don’t provide comfort, take your profits now and invest in something much safer, like bonds, certificates of deposit, etc. You won’t get nearly the same return over the long term as you will in the stock market, but you’ll have much less stress. Stress about financial matters breaks up marriages, causes health problems and is miserable to live through. So if knowing that your time horizon is long enough to make back potential losses and that trailing stops will protect your capital isn’t enough to keep you calm, don’t expose yourself to the market or that stress.
Having a plan for this bear market will make it much easier to weather this storm.
Sven Franssen