The official definition of a bear market is when the stock market dropped by 20% or more. History shows that every bull market is followed by a bear market, just as every bear market is followed by a bull market. Bull and bear markets are normal but unpredictable. That’s why many investors are so afraid of them. But the lower the market goes, the more excited we should get because everything is on sale!
But why does the private investor not feel that way? Most are terrified, frustrated and are averse to taking new positions or adding to existing ones. In reality, we should pick up bargains while they are still cheap. We should accelerate buying whenever stocks get into bear market territory, as they did in the bear market of 1990, during the dot-com collapse, after 9/11, during the financial crisis and of course, during the COVID collapse.
Now we are in a bear market again. Stocks can always go lower but they can go lower in a bull market, a flat market or a bear market and for longer than we expect.
Here are 5 reasons, why we should take advantage of the opportunities on offer:
1. Look forward, do not look back
Too many individual investors are obsessed with how much their portfolios are down from the peak. But we should be much more interested in the actions we can take today that will determine what our portfolio will be worth in the future. Nothing else.
2. Have a long-term time horizon
Don’t have money you need in the short term in the stock market. You won’t be forced to sell at unfavourable prices, exactly when you need it. Take money out of the stock market that is needed within the next year or even two.
3. Have an asset allocation
Spread your investment into different asset classes such as real estate, commodities, precious metals, crypto, bonds, cash and short-term time deposit. Do not put all money into the stock market or all eggs into one basket. Diversify into different asset classes but also into different assets within these classes.
4. The long-term odds are in your favour
Look at the long-term charts of the stock market and you will find out that any significant dip (bear market) was an excellent buying opportunity. Historically, you never lost money when you hold on to your investments in the long run. Start at any date over the last 100 years. On average, U.S. stocks were higher in 1 year 74% of the time, higher in 5 years 86% of the time, higher in 10 years 94% of the time and higher in 20 years 100% of the time. These are excellent odds, and it is a no brainer to use them in your favour.
5. Have a plan
In principle, the stock market transfers money from people who do not have a plan to people who have one.
It is unpleasant to see the value of our stock holdings fall. This is real money and not just a game. Of course, we feel anxious or afraid or regretful and it is okay to feel those emotions. But do not act on these emotions and run to cash, promising yourself that you’ll get back in later, when things look better. Timing the market does not work. It never has and won’t. When things look better, stocks will already be higher. The market will move higher, probably substantially, well before either sentiment or the economy turns up. So, if you are not in it, you can’t win it!
The sophisticated and experienced stock market investor knows that when the outlook is negative, consensus pessimistic and share prices low, then this is the best time to buy. It never feels that way, of course, but that doesn’t stop it from being right so.
Sven Franssen