We are officially in a bear market. How you weather the storm in wild rides and times like this can make or break your long-term investment success. In particular, you need to avoid these 5 biggest bear market mistakes that investors repeatedly make:
1.) Acting emotionally and not rationally.
When stocks go significantly down, most investors feel some combination of fear, anxiety and regret. They feel compelled to do something about this to relieve the pain. Unfortunately, the main action is selling. But selling is generally exactly the wrong thing to do. This action is emotionally driven rather than reasonable.
Remember: The stock market is a leading indicator not a lagging one. Share prices start trending higher before the good news actually arrives. Investors who exit the market risk getting left out and missing the point to enter again. You can’t profit from a market rebound unless you’re actually in it.
2.) Buying stocks simply because it has fallen in price
When a stock goes down, the thing we know for sure is: it’s cheaper than it has been before. It doesn’t necessarily mean the stock is undervalued or ready for a rebound. Even a significant drop may only take a stock from extremely overvalued to significantly overvalued. the Stock price alone does not make a stock undervalued. It very much depends on the outlook for the business.
3.) Trying to pick the bottom
Trying to pick the bottom is a huge error. Whether we’re in a bull, bear or sideways market, stocks can always go lower. Nobody has a crystal ball and no one can foresee the future.
4. Expecting the market to bounce back immediately
The last 19 U.S. bear markets over the past 140 years lasted 289 days on average. So, if this bear market is just average, we’re only halfway through.
5.) Ignoring history
A century of stock market history demonstrates that each bear market was an outright buying opportunity. Looking back at every bear market of the past, the worst investors sold at the bottom, the mediocre investor did nothing and the best investors took advantage of the downturn and bought stocks at attractive prices.
It is up to you and your own action how to handle this situation. Time will tell if you have been in 2022, a lousy, mediocre or one of the best investors.
Sven Franssen