Do not panic — Bear markets are a normal part of the market life cycle as an investor
After reaching their January highs, the S&P 500 (NASDAQ) and NASDAQ plunged into bear market territory. They fell more than 20% in the first half 2022. This plunge prompted renewed interest in the age-old question: Are you in a bearmarket? What does this mean for individual investors?
A drop of 20% or more in an security or index is generally referred to as a bear market.
Some bear markets can be short-lived as was the case with the COVID-19 lockdown in 2020. However, others can last for a long time, as was the case with the Great Recession.
Investors are trying to figure out if security prices will fall further after the six-month slide that began this year. This news is a reminder that stock prices do not always rise in perpetuity and bear markets can offer investors new opportunities.
Investors have had plenty of bad news in the first half 2022
Investors must consider various risks when developing a sound investment strategy. These include supply chain issues and labor shortages as well as spikes in rent and home prices.
We don’t have a way to predict the future of financial markets. It doesn’t matter if investors can’t forecast the future, but how we react to market volatility and build our portfolios.
The Economic and Financial Markets Cycle
According to behavioral finance experts, investors can let their emotions cloud their judgments and make decisions that are ultimately against their long-term investment goals in the economy and financial markets cycles.
Investors are tempted to panic and sell down when markets change. Social media is abuzz with debates about whether we are in recession or not. Financial markets have already predicted an economic contraction in fixed-income and equities. How long these headwinds can continue is the real question.
Investors have greater access to information about the economy, financial markets and other important topics
Investors have greater access to information than ever about the economy and financial market. It is also easier than ever to trade with numerous financial technology apps that provide easy access to trading platforms. Investors are more likely to respond positively or negatively to market changes.
Many investors today may feel invincible after nearly 13 years of market expansion. They bought stocks and traded options before the recession hit.
Many people were making money, so every investment might have looked like a win. False expectations were created by the prolonged market cycle and the historically unprecedented fiscal stimulus and monetary policy stimulation during the COVID lockdown. People believed that the good times would continue into the future.
Unfortunately, too many investors were overconfident and bought high just as the market crested.
Wall Street is familiar with the phrase “Don’t fight Fed”. Unprecedented fiscal and monetary policies provided a strong tailwind to most investments during the COVID-19 peak.
Congress passed laws to give money to American consumers and companies. The Federal Reserve also offered accommodative policies to pump cash into the economy, as the federal government gave stimulus money.
These policies helped extend the bull market’s reach through the early days of the pandemic, which was a great success for many investors.
However, “Don’t Fight The Fed”, works in both directions. First, the Federal Reserve has shifted to restrictive policies in an effort to control inflation. Now they are aggressively raising interest rates.
At the time of writing, inflation remains at its highest point since the 1980s. Therefore, the Fed will likely continue to use every weapon in its arsenal to try to reduce inflation.
Fear is driving many retail investors to sell due to the substantial pullback in equity markets in the first half, especially in large-cap technology companies. This locks in losses and limits their ability to grow long-term wealth.
The Market Cycle’s Ebb and Flu is a Normal Part
Investors are often confused by the market’s pullback after a long bull market. This is because investors don’t understand that these fluctuations are normal parts of the market cycle. Stocks will eventually need to be re-priced as the market cannot go up forever.
However, it is impossible to predict what the market will do each day. Therefore, trying to time the market is often futile. Panic is not an option. Don’t panic as long as your portfolio has the right diversification based on your investment goals. Relax, let the market take its course, and then sit back.
Diversify according to your timeframe and invest
Recessions are a natural part of life. There is no need to panic as long as you have a diverse portfolio and are investing according to your goals.
It is possible to invest to reach different goals, such as retiring comfortably in 20 years, going on vacation next year, or buying a new car within five years. It is important to ensure that your investment allocations are in line with each goal’s timeline. Also, avoid high-fee products and focus on the long-term.
Consider your time horizon and decide how much you want to save. If you’re many years away from retirement, your retirement allocation in equities will likely be close to 100%.
You should have a diverse portfolio to protect your money so that you can forget about it.
Your money for next year’s vacation will be mostly in cash and cash equivalents such as certificates of deposit (CDs) or cash equivalents. For goals that are likely to be reached in the future, it is a good idea to invest in fixed-income securities, such as fixed-income exchange traded funds.
Equity investments become more important as your investment goals get longer. You should be aware that selling investments to support long-term goals can result in you locking in your loss.
For any long-term investment strategy, diversification is key
It’s better to invest your money in a variety of security options than just one. If you invest all your money in one stock, option or cryptocurrency, you might become rich. However, while everyone is bragging on social media about how much they made from one trade, many others have lost their entire fortunes.
Investors need to know the difference between investing and having an investment strategy that is solid, and speculation or gambling.
Are you able to understand why the investment you are looking at is moving higher or lower? Many media outlets focus now on short-term trading. Investors must understand that this is speculation and not investing.
Long-term Investing is possible and should be easy to understand
Long-term investment shouldn’t be difficult. It shouldn’t also require a lot of management effort. It’s not difficult to develop a long-term strategy for investment. The hard part is sticking with it in turbulent market environments.
We should be able to feel confident about investing our money and not worry, panic, or check for updates constantly.
Avoid short-term speculation and get-rich-quick schemes that are difficult to understand. Jack Bogle once stated, “Investors win; speculators fall.”