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 strength of its participants.
And 2022 is just the last episode in the saga.
With the S&P 500 declining up to 23% so far this year and its technological cousin, the Nasdaq CompositeWorse yet, there are investors who are likely to leave the market for good in the coming weeks (if they haven’t already). In fact, a recent Allianz Life survey found that 43% of investors are too nervous to buy stocks at current levels.
But if the goal is to buy low and sell high, why would investors hesitate to buy when stocks are cheap?
This is the investor’s dilemma. We all say we are going to buy when the market is down, and yet when the opportunity presents itself, we find it difficult to pull the trigger. Here are three reminders to help you stay on track so his portfolio can come out on top in this bear market.
Net buyers of shares win in the long run
One of the simplest reminders to calm nerves during a bear market is that the market has never stopped bouncing back from previous declines.
Consider the chart below that tracks the overall returns of the S&P 500 and Nasdaq, as well as their all-time highs in recent decades.
This chart can be a bit confusing at first glance, but it is actually quite simple. The straight horizontal lines represent the time period between the historical highs of both indices.
There are two important conclusions:
- Both indices have bounced back from each drop to recapture their all-time highs and rise even higher.
- There have been long stretches of time for both indices before they recaptured those all-time highs.
The second conclusion is not as encouraging, but it should actually be the biggest motivator to keep investing through bear markets. If you plan to wait until the market recovers to start investing, know that you could wait more than seven years based on the longest recovery in the S&P 500.
Worse yet, technology investors who left the market after the dot-com bubble lost almost 300% of nasdaq profits in the next 15 years:
Finally, here are a couple more stats to help you remain a net buyer of stocks today:
- Half of the best market trading days take place during bear markets.
- Midterm election years tend to be brutal 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 gets me down, I often fall back on the words of legendary Investment fund Director Peter Lynch.
He had this to say about using his unique advantage when buying stocks:
People have amazing edges and throw them away […] If you had worked in the auto industry, let’s say you’ve been a car dealer for the last 10 years, you would have seen Chrysler come up with the minivan. If you were a Buick dealer, a Toyota dealer, a Honda dealer, you would have seen the Chrysler dealership packed with people. You could have made 10 times your money at Chrysler a year after the minivan came out.
Lynch’s point is that instead of chasing major stocks, look for companies in your area of expertise.
People are more than willing to put money into industries they know nothing about because the rest of the market is doing it, even when there are great opportunities in their own fields of expertise.
So if you’re scared to put money in the market right now, consider looking at stocks where you have a unique edge. To be honest, this is good advice in any market cycle, but it can give you the conviction you need to keep investing during bearish periods.
put on your opposite hat
To be successful in investing, it may be worthwhile to look at the market in a contrarian way. And in a bear market, there are tremendous opportunities to be contrarian.
Right now, many investors are writing off virtually all tech companies. The market is collectively saying that because inflation is taller and Interest rates are on the rise, technological growth will stall for the foreseeable future.
Much of this is muscle memory of the dot-com crash when hundreds of companies went public with weak or non-existent underlying business models. But many of the tech companies that were sold last year are highly profitable and push society forward in the digital world.
I doubt that rising interest rates will significantly impede this advance and that investors will buy quality growing companies at cheap prices you will probably reap the rewards in the future.
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