Don’t panic — Bear Markets as Investors are a Natural Part of the Markets Life Cycle
After hitting highs in January the S&P 500 & NASDAQ plunged to bear market territory. The first half of 2022 saw a drop of more than 20%. This tumble brought back the old question: Are there bear markets? What does that mean?
Bear markets are defined as a 20% drop or more in an index, security, or other financial instrument.
Some bears markets are short-lived like what we experienced in 2020 when COVID-19 was locked down, but others can last as long as the Great Recession.
Investors are trying figure out whether or not the worst has passed after the six-month slide to begin this year. This news reminds investors that stock market prices don’t go up forever and that a bear market could present them with new opportunities.
The first half-2022 was full of bad news.
Investors need to consider several risk factors when developing an investment strategy.
There is no way for anyone to know what the future holds. So it doesn’t matter whether investors can forecast the future. What matters more is how we respond and build our portfolios.
The Economic and Financial Markets Cycle
Behavioral finance experts have found that investors tend to let emotions cloud their judgements, which can lead them to make poor decisions about the economy and financial markets.
Investors have the tendency to panic and sell high when markets shift. Social media is full with discussions about whether or no recession is currently taking place. The financial markets have already priced the economic contraction for fixed-income assets and equities. The question is whether these headwinds will continue for as long.
Investors have better access to financial market information and the economy.
Investors have now more information on the economy and the financial markets than ever. Additionally, it is easier to start trading with a variety of financial technology “apps”, providing easy access to trading platform. Investors are much more likely, therefore, to react positively to any changes in market conditions.
Many of today’s stock- and trading options investors feel confident having experienced almost 13 years in market growth. This may be because they bought stocks before our economy began to decline.
Investments may have looked great and people were making lots of money. The prolonged market cycle and historically unprecedented fiscal or monetary policy stimuli during the COVID Lockdown led to false expectations. People thought the good times would continue in the foreseeable near future.
Unfortunately, many overconfident investors purchased high at the peak of the market.
Wall Street is well-known for saying “Don’t fight with the Fed”. During the COVID-19 Pandemic, unprecedented fiscal policies and monetary policy created a significant tailwind that benefited most investments.
Congress passed legislation to allow money to be transferred to American consumers as well as companies. The Federal Reserve also had accommodative measures that helped pump money into the economy while the federal government provided stimulus money.
These policies extended the bullish market into the pandemic’s earliest days, and many investors prospered.
But “Don’t Fight The Fed,” can be used in both directions. First, to combat inflation, the Federal Reserve has adopted restrictive policies and is aggressively raising interest rate.
As of this writing inflation is still at its highest levels since the early 1980s. So the Fed will likely use all the weapons it has to try to control inflation.
With the notable pullback seen in equities during the first half, especially among large-cap technology brands, fear has caused many retail investors sell. This is locking them in to losses and restricting their ability grow their money long-term.
A Normal Part Of the Ebb-Fluence of the Market Cycle
Markets have been in decline since a prolonged bull market period. It is difficult for investors to comprehend that these market ebbs, and flows are part the normal market cycle. Stocks will eventually be priced because no market is static.
The truth is that no one knows what the markets will do every day. So trying to predict the market is often a fools errand. You shouldn’t panic as long your portfolio contains the proper diversification according to your investment objectives. Instead, just relax, allow the market to do its thing, and sit back.
Diversify and invest according your timeframe
A recession is a part of every person’s life. There is no reason for panic, as long the portfolio is diverse and you invest according to your specific goals.
It’s easy to invest to meet different goals. It is crucial to make sure your investment allocations align with the timeframes for each goal. Additionally, you should focus on long-term goals, diversify, and avoid products with high fees.
Your time horizon is a guideline for how you should invest your money. You might find that your retirement allocation is close to 100% if it is many years before retirement.
Your money should be invested in a portfolio that is well-diversified, so you can just walk away from it.
For your vacation next year, the money you are investing will be primarily in cash or cash equivalents like certificates-of-deposit (CDs). But, you can use fixed-income securities to achieve goals that may not be possible for a few years.
As your investment goals become longer-term, equities are more important and more relevant to your portfolio. Keep in mind that if investments are sold to support long term goals, you are effectively locking the loss.
Diversification Is Key to Any Long Term Investment Strategy
It is better to diversify your investments and not just keep all your money in one stock. If you put all of your money into one stock option, cryptocurrency, or stock, you could be rich. However, everyone bragging on social networks about how much money one trade made them, is a distraction from the fact that thousands of people lost everything.
Investors need to learn the difference between investing in solid strategies and investing for speculation.
Do you fully understand the investment and why it is increasing or decreasing? While many media outlets have a tendency to emphasize short-term trading, investors should understand that it is speculation and not investment.
Long-term Investing can and should be straightforward
Long-term investments should not be difficult. But creating a longterm investment strategy is not the hardest part. It’s the sticking to it even in turbulent markets.
Investors should feel comfortable putting their money to use, and not be stressed, anxious, or constantly checking the web for new updates.
Avoid get-rich-quick schemes, short-term speculation, and other difficult-to-understand strategies. Jack Bogle once said “Investors win, speculators fail.”