You Should Embrace This Bear Market
If you aren’t living off your investments, this bear market isn’t a problem, it’s an opportunity.
THE BEAR MARKET IN STOCKS
On February 19th, 2020 the S&P 500 index closed just above $3,386, an all-time high. Upon completion of this blog post on March 12th, 2020 the S&P entered official bear market territory when it closed at $2,480. That’s a drop of almost 27% in just over 3 weeks! This is largely a result of the continued uncertainty surrounding the impact of the Coronavirus both in the U.S. and abroad. But this post is not about the virus, or why the market is down, this post is about what we, as savvy investors, should be doing about it.
I want to start by acknowledging that seeing your equity portfolio drop almost 27% in 3 weeks is painful. As a stock owner, I can attest firsthand to this feeling. Bear markets are tough and 27% represents a lot of actual dollars for many equity portfolios.
Volatility, in general, is uncomfortable and portfolio losses can certainly feel painful. This time around is no different. Even for those long-term investors who aren’t living off their investments, experiencing a drop like this one in your portfolio feels crappy. However, if you’re one of these long-term investors, I’m here to tell you that you need to embrace this bear market in stocks and make the most of the opportunity it presents.
SUCCESSFUL INVESTING IS COUNTERINTUITIVE
18th-century banking magnate, Baron Rothschild, made a fortune buying in the panic that followed the Battle of Waterloo. He’s credited with saying investors should, “Buy when there’s blood in the streets, even if the blood is your own.” Not the kindest sentiment, but true none the less.
Warren Buffett made a similar observation when he suggested investors should, “be greedy when others are fearful”. Both investing legends are pointing out the unfortunate fact that successful investing is counterintuitive and usually requires doing the opposite of what your gut is imploring you to do.
Successful long-term investors experience losses in their portfolios just like everyone else when the market gyrates. It’s how they respond to these gyrations that makes them successful.
DON’T BE YOUR OWN WORST ENEMY
Successful investors focus on not beating themselves. Instead of bowing to their emotions and selling in an attempt to avoid further losses, smart investors stay the course. When they’re in a position to do so, they take advantage of the opportunity to buy additional shares “on-sale”. This may seem an obvious decision for some, but for most investors, it’s not.
As savvy consumers, we tend to buy more of a good or service when it’s on sale. This makes sense. Why not take advantage of the short-term drop in the price? However, when stock prices go down, investors (stock consumers) often want to do the opposite and buy less stock. This mindset usually holds until prices rebound back up, at which point stocks seem less risky and become more attractive to buy again. In other words, investors actually tend to prefer buying high over buying low!
There are behavioral tendencies that we all have which explain why investors react in this irrational manner. Loss aversion (disliking a loss more than liking the same gain) and Recency Bias (giving more weight to what has happened recently than to what has happened in periods further back in time) are the main culprits. They will be discussed in greater depth in future posts.
TAKE ADVANTAGE OF THE SALE
So, what does this mean for you? If you’re on the younger side and you’re a buyer of stocks (even if only through your employer’s 401k, 403b, 457 or similar plan) I urge you to take the glass-half-full view of this correction and recognize it for what it really is: an opportunity for you to purchase stocks almost 27% off the price so many people were happy to pay in mid-February. If you liked buying stocks for the long-haul then, you should love the chance to buy them so much cheaper now!
Unfortunately, as mentioned above, most investors don’t see it this way. They feel the pain of the loss, hear the “experts” on TV talk about how bad things are, and often decide to stop buying stocks; or worse, they panic and sell out of the market. I urge you, DO NOT DO EITHER OF THESE THINGS! Instead, you should consider doing the opposite. Hold onto the stock market exposure you have in your portfolio and if you’re in the position to do so, you should consider adding to it.
STOCKS COULD SLIDE FURTHER
To be clear, I’m not claiming the market has “bottomed”, or that it won’t continue to go down in price. I don’t believe anyone can successfully predict the future and time the market (certainly not with any consistency) and I’m no different. I am saying that if part of your financial/retirement/wealth-building plan involves owning stocks for the long run, then you should not shy away from this opportunity to pick up some sweet deals during this bear market.
Sure, the market might be even lower in a month, 3 months, a year, or more. But, if you’re not planning on needing that money in the next handful of years, who cares? If the market goes down further, it’ll just mean an even better deal for you to add to your portfolio.
I do know one thing with absolute certainty: The stock market, which has historically been the best mechanism to grow long-term wealth, is now almost 27% cheaper than it was 3 weeks ago. Further, I feel extremely confident that in 15, 20, 30+ years, the S&P 500 will be trading at levels far higher than we’re seeing today. From that perspective, I’m sure this correction will be viewed as nothing more than a run-of-the-mill market dip and a great opportunity for savvy investors to have purchased more shares.
If you’re interested in learning more, please get in touch.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Robert Stromberg, and all rights are reserved. Read the full Disclaimer