Smart investors know that the market can always turn; that’s why they try to make sure they’re in a good place when the markets go back up. Because, if history is anything to go off, that’s typically inevitable, too.
The S&P 500 Index, which mimics the 500 largest shares in the US stock market, has grown from $676.53 on 9 March 2009, the lowest point in the Global Financial Crisis, to $3,225.52 on 31 January 2020. An increase of around 377%.
A lot of people are calling this run the longest bull market ever. If this bull market were a kid, it’d be bugging its parents for the new iPhone 11. Yes, there has been dips, but if you would have invested your money in the sharemarket for the last 11 years, it’s fairly certain you would have seen your portfolio go up.
377 per cent. That’s amazing.
But here’s the catch. That’s history. And if history tells us anything, it’s that bull markets don’t last forever. What normally follows is the bear market. A bear market is a market of extended periods of losses.
We can’t predict when a downturn will happen, no one can, or how long it will last, but like everyone else – we do agree that it’ll probably happen at some point.
So it’s probably coming. At some point. Maybe… The important thing to think about is what will you do when it comes? Sell everything and move everything to cash? Probably not.
History can be a great teacher and if it tells us one thing, it tells us that if you panic during a bear market, you could be losing the opportunity of a lifetime.
Luckily for you, the right way is sometimes far easier. You do nothing.
1. Don’t panic. Repeat. Do not panic.
Whenever a bear market rolls around, we often feel the natural response of fear. All of our gains are gone. Savings diminished, the world is ending. Sell. Sell. Sell. This is normally a great attitude to have if you want to make sure that your losses stay losses.
The old adage of “you only lose money if you sell”, is both right and wrong – like most cliches.
We believe that time in the market, not timing the market, gives a greater opportunity for good long-term investment returns. If you sell everything when the market drops by 2% in a day, then buy back a month later when things are looking better, all you’ve done is lock in a 2% loss.
You’d probably be better if you just forgot your password…
2. Remember what you’re investing for
If you’re investing via your superannuation, but you don’t plan on retiring for decades, stop looking at the short term. What happens now probably won’t matter to you.
It’s about what happens over the long-term that matters.
3. Bears don’t run as far as bulls
According to CBS News, the average duration of a bear market since World War II has been 14 months. Bull markets on the other hand have averaged about 4.5 years.
4. It’s your time in the market, not timing the market
We all know that the goal of investing is generally to buy low and sell high. So it can make sense to wait until the market tanks to buy, and after that downturn happens you snap up bargains. The problem is no one can perfectly predict when the market will tank.
Even Warren Buffett says: “Our favourite holding period is forever.”
5. Find an investment vehicle that ticks along in the background so you don’t have to think about it
This is one of the best ways to take the emotion out of investing. Once it’s automated, the decision-making is out of your hands. If you’re in Australia, you’re lucky. You’re probably already investing 9.5% of your salary into your super.
6. If you’re new to investing, give it time
We’ve all seen the movies where a genius makes $1 million in five minutes by shorting a particular stock for a specific period of time. Sadly, for most of us, that won’t happen.
Here’s what you should know about investing: It’s an emotional game, when the markets go down, a lot of people tend to freak out.
So if you’re a new investor, you can take some of the decision-making away from yourself by following the above action point. If you keep making regular investments, regardless of what the market is doing, it can be a great way to dollar-cost average into the market.
7. Sometimes doing nothing is better than doing something
8. Average into the market with dollar-cost averaging
An important thing to understand is that the economy will have negative years, it’s part of the business cycle. If you’re a long-term investor, one option is to average into the market by dollar-cost averaging.
This means you purchase regardless of the price, and you end up buying when the price is low and when the price is high. Over the long run, your cost will be the average of the highs and the lows.
9. Look for value stocks
Bear markets can provide great investment opportunities. As Warren Buffett has said time and time again:
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."
10. Understand your risk tolerance
Losses are a part of investing, again, to borrow from Mr Buffett:
"You shouldn't own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress."
And some food for thought…
"Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do." – Warren Buffett