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Unless you live under a rock, you must have heard that the US economy is facing high inflationary pressures. The federal reserve is trying its hardest to control this ever-increasing inflation. As if this was not enough, geopolitical crises, including the Russia Ukraine war and the subsequent economic sanctions, including those on the oil supply of Russia, have scared the lights out of the investors. In the last few days, NASDAQ was down 30% from its previous high, and S&P500 was 20% off its highest, indicating a bear market.
So if you are starting your investment journey or are scared to lose your hard-earned investments, bear with me till the end as I discuss the playbook to face the bear market successfully.
I am Armaghan, and this is my story for today!
Rule 1: Understand what is a bear market?
A bear market is when the market is in a prolonged state of price declines. For a stock market, this typically describes a condition where the price of the shares falls 20 percent or more in the middle of widespread negative investor sentiments. Remember that this 20 percent is just an arbitrary number that can be more or less, but the overarching sentiments during a bear market will be negative. Investors will generally try to stay away from risky investments that are based on speculations.
On May 22, 2022, the US stock market saw a chaotic day. The share prices went into the bear market territory, extending the fall of the S&P500 index to seven consecutive weeks, its worst stretch since the dot-com bubble burst more than two decades ago. On that Friday, the S&P 500 saw a decline of more than 20% from its peak of third January before slightly recovering at the end of the day.
Since 1950, the US has seen fifteen bear markets with an average length of twelve months. The recovery to the previous high, the break-even point for the recession, on average, has taken twenty months from the peak day.
So, if this is an average bear market, starting from the peak of second January 2022, then it will reach the bottom at the end of this year and will be back to its previous high by August 2023.
Notice that I said if this is an average bear market. It is important to note that out of the fifteen bear markets since the 1950s; three have taken significantly longer to recover than the average twenty months. This happened in 1973, 2000, and then in 2008. During these bear markets, it took more than four years for the market to get back to the break-even point.
No one can say for sure how long this bear market will take. But if you are following the playbook, then the timeline will not bother you.
Rule 2: Look at the bear market as an opportunity
As of today, the chances are that you are more interested in whether the stocks will fall another ten or twenty percent or will they start rebounding soon. But in a few years, the only thing that will matter is how many additional shares you bought during this meltdown.
Think about it for a moment. If you are someone like me who has extremely limited funds and can only invest a small portion of a monthly paycheck, this bear market is something to look forward to. If I talk about myself, this is the only time I can actually think of investing in companies like Microsoft or Adobe that have stable operations and excellent management. Now the price is somewhat in my range. As Warren Buffet said, “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”
Obviously, investing more of your hard-earned money into the stock market does not feel good when your existing portfolio of shares is seeing a consistent drop in value. But if you are an optimist and are willing to invest for the long term, then these market downturns are a great time to buy stocks.
Rule 3: Zoom Out — Look at the bigger picture!
The idea of long-term investment is simple—one percent buying. Ninety-nine percent waiting. The problem that we can see is that many investors continuously tinker with their portfolios to gain short-term results.
Let me give you an example. One dollar invested in 1970 would have grown to sixty-eight dollars in the past fifty years by 2018.
In these fifty years, so many events impacted the stock market at that particular time; wars, inflation, rising interest rates, terrorist attacks, and recessions. Yet we can see the dollar growing when we zoom out and look at the whole period.
Many investors believe that they can time the market based on macroeconomic factors. But that is not true. On average, a recession lasts eleven months compared to an expansion that lasts around sixty-seven months.
The stock market rallies, in the past, have started way before the economic expansion started.
So, timing a market is an excellent idea in theory, but unfortunately, no one can actually predict market movement consistently with accuracy. So, the rule is that you should always have a bigger picture in front of you.
Rule 4: Control your emotions
Even the best of us fail.
That is just how life works.
Investing is no different.
The biggest challenge in both the market expansion and the market contraction is not the losses or gains you make. But it is the emotions that you portray while making those losses and gains.
The timing of the market or the price movement of the shares has a significant impact on how an investor feels. The optimism in a bear market can help you face the challenges of price drops, but an overzealous approach to investment during the same period can bankrupt you.
Similarly, the belief that you have read the fundamentals correctly and the shares are mispriced will help you make the initial investments in the stock market. But the same emotion can be considered a denial when you continue to invest in a share with many red flags.
The shares you invest in result from so many factors: the time horizon for your investments, geography, size, style of investment, company selection, and many more. But all of this becomes secondary if you do not control your emotions while making a decision.
I am telling you this from personal experience. I have lost hundreds of dollars when I let my emotions decide for me. For example, recently, I lost money on an investment in Luna. I could see the red flags. I read the market reports and knew about the repercussions of not getting out. Yet, I stayed and, in fact, bought more Luna, and then all of it went down the drain.
At this point, I will encourage you to think about following me and sharing this with your friends if you like what you are reading.
Rule 5: Automation works. Stick to it.
Periods of high volatility can make or break you as an investor. But what I have realized is that if you follow a system, you can protect your portfolio even in the bear markets.
I don’t consider myself an investor. I have recently started looking at the stock market to make investments. I studied different investment strategies and what successful investors were doing, obviously considering my financial situation with limited funds available for investment. I came to this conclusion:
- Invest a fixed portion monthly
- Do not sell your winners for short-term gains.
- Do not buy based on a gut feeling and instead analyze and overanalyze everything.
- Invest with a long term perspective, at least five years
So every payday, I have this small amount that I can spend on the stock market. I analyze dozens of shares every month for their fundamentals and valuations. But since I have a very small amount available to invest, I only go with my top one or two choices. At the same time, this strategy essentially forces me to invest even if the other investors are in panic mode or shying away from investments.
So if you have a system working for you, there is no need to tinker with it continuously. Just follow it irrespective of the cycle of the stock market. Remember, bear or bull market, both are temporary, but your systems are permanent. Trust them.
Rule 6: Quality over Quantity
As I said earlier, a bear market is a perfect opportunity for you to get into the stock market. It is one of those times when you can invest in a stock that you wanted to own for a long time but couldn’t because it was way out of reach from you or because it was just not worth it at that price point. For example, for me, that stock is Microsoft. I will share my analysis of the stock in the coming days.
But for you, it can be an entirely different company or industry to invest in. High-quality businesses are everywhere if you can search for them. If a business has a large addressable market, is taking future growth initiatives, has increasing or stable profit margins, long-term vision, and substantial competitive advantages, there is a high probability of the shares of that company being a value addition to your portfolio.
Keep in mind that the volatility and unpredictability of the stock market are significant factors to consider at all times. So, it should not surprise you that despite all the positives that you saw, the stock you invested in falls another ten or twenty percent right after you buy it. That is the cost of doing business. If you have your emotions all over the place for every price drop, you should consider going for index funds instead of individual stocks. But at the same time, if you have done your research properly and have invested in a quality business, the chances of your investments rebounding increase drastically.
Rule 7: Patience is a virtue
Obviously, there is a lot of pain when you see the value of your portfolio go down in real-time and sometimes within a few hours. But before you decide that investing is not your cup of tea, you should first answer this fundamental question. Have I given my investments enough time to flourish? It is a fundamental question but the most important one. Because when you answer this question, you effectively take all the short-term biases out of the equation, things as negative headlines of the day, lower target prices, and missed estimates.
Sometimes the best strategy is to do nothing at all. This discipline will get you to reap the benefits of compounding over the years. Even the best portfolios will not go up in a straight line. This is the nature of the beast. So, all you can do is be patient and trust your system.
A bear market is a fantastic opportunity for you to grow your portfolio. The largest companies that have driven the US indices in the last so many years have been excellent investments, for example, Apple, Microsoft, and Google. An ideal company for our investment would have a similar trajectory to these three, no matter what cycle the stock market is passing through. The key is to stay optimistic and be patient. A few of your investments will have similar paths, but you will have to give the shares enough time to keep them in your portfolio to flourish. By keeping this playbook in front of you, you can effectively protect your portfolio and even grow it, even in a bear market.
I’m Armaghan Tanveer, a numbers guy by profession and a romantic by heart. I write about everything I find interesting, including productivity, investments, passive income, and personal experiences. If you like what I do, you can buy me a coffee ☕️ here.