How to deal with these bear market conditions?

Let's face it... Since January 2022, we have experienced very little joy in the equity markets. A lot of long-term investors are now looking at significant losses and are left destitute. (Read our latest market update)

Especially for those who had just started investing in stocks, these are very harsh times. There you are, you've finally decided to put some of your hard-earned money to work and barely a few months later you are faced with a significant loss. No one doubts that an inflation of 8 to 10% is bad news for your savings, but that still sounds a lot less bad than having to face a loss of 20% on your equity portfolio...

For the regular investor, a bear market is no fun. Everyone obviously wants every day to be a green day with ever higher prices and higher profits. But that is not the reality. Bull markets simply alternate with periods of lower or even negative growth.

As a long-term investor, it is therefore important to focus on the future and not so much on the daily price movements.

Those who have been in the stock market for some time know that every bear market ultimately also offers opportunities and that, for a long-term investor, "time" is the greatest ally. Patience and consistency are two of the most important qualities to get through these turbulent times. Are you currently suffering from stress or even sleepless nights? Then maybe it's time to stop and think about your goals and consider possible solutions.

I have listed a few general concerns, known pitfalls and tips that may help you recognize some things, put them in perspective and hopefully find some peace again.

Exposed capital

The main cause that people lie awake over their investment portfolio has to do with the total sum they have invested in it.

Investing is a smart choice but exaggerating is just never a good thing. A golden rule is to invest with money that you know with great certainty you will not need for the next 10 to 20 years. The exceptions prove the rule and certain events in your life can never be foreseen but the normal costs to expect should be covered by your income and ordinary savings account which act as a first buffer. Living expenses, repairs in and around the house, buying a car,.... Actually, these are all things for which you should never think about your investment portfolio in the first place. Also for those who intend to make a considerable investment within the next 5 years (purchase of their own home, for example) it is advisable not to put the initial capital provided for this purpose in the stock market just like that...

So be honest with yourself and make sure your invested capital represents a sum you can feel comfortable with at all times, even if the economy takes a turn for the worse and your portfolio falls considerably in value.

Exaggerated sentiment

Typical to both bull and bear markets is the fact that investors exaggerate. Two of the most commonly used terms are "fear" and "greed" and although they are clichés that are almost as old as the financial markets themselves, there is a lot of truth in them.

In euphoric bull markets everything rises, including shares of companies that under normal circumstances would hardly be able to survive. However, this also applies to bear markets where the really big established companies with proven track records are pulled down by the prevailing negative sentiment. As an investor, don't get distracted by this, you can't change it at all. This is not a new phenomenon and it will repeat itself many times in the future. Get over it!

Allocation of your investment capital

When allocating capital, many investors will automatically make the link with diversification, being the composition of a balanced share portfolio with enough shares from different sectors/industries to be as broadly invested as possible.

What is given much less thought is the way in which we are going to use the capital for this purpose. After all, no one is forcing you to invest your entire investment capital at once. You can just as easily opt to do so in fractions and buy shares of your favorite companies, for example, quarterly or semi-annually. Periodic buying is one of the best remedies against sleepless nights because you no longer have to lie awake wondering whether you have bought at the right time. In times of severe price drops you can even benefit from it.

We have already written that sentiment ensures that "fear" and "greed" get the upper hand and as a result even strong companies are confronted with sudden sharp price drops. By buying periodically you will also be able to benefit from these lower prices.

Diversification (equities)

A word about diversification in your portfolio. Diversifying across different sectors is absolutely recommended. However, if you are at the beginning of your investment adventure, this is not so easy to realize, at least not if you want to do this by buying individual shares. Even if you want to start with at most 10 different shares, for many beginners this will already mean a considerable investment.

If you currently only have a few stocks in your portfolio because the capital for more stocks is simply not available, then it might be an option to look into, for example, an ETF that follows an underlying index. If you buy an ETF that tracks the S&P500, for example, you are automatically invested in the 500 largest US companies. A much better diversification that requires a lot less capital! For many investors ETF's are a very good alternative and once you have gained some more experience (and some more capital to spend) you can always complement that later with individual stocks on which you want to focus more. (explore all the available etf's worldwide in our stock screener)

Don't make hasty decisions

The worst thing you can do in these market conditions is to make rash decisions. Think carefully before taking certain actions and always weigh them against your original goals and chosen strategy. Many - especially new - investors start with the self-proclaimed focus that they are in for the long term. Until they face their first serious stock market crisis and out of sheer frustration liquidate their entire stock portfolio and never buy another stock.... As a matter of fact, it is not unusual for this to happen just after the most severe downturn is over.

On the other hand, there are also those who blindly buy more because the stock keeps getting cheaper. It is true that buying at lower prices can be an interesting option, but it must be done with knowledge and a clear strategy. Just buying large packages to lower your average purchase price is downright dangerous and not at all comparable with a periodic strategy where you buy more shares at regular intervals, independent of the share price.

Stick to your strategy

As a long-term investor, don't fall into the trap of wanting to take profits off the table too quickly in the future because you've had bad experiences with a bear market. A quick example to make this clear...

Suppose you have a total of 10 open positions. In 7 of them you have managed to realize a nice profit in a relatively short period of time. You hesitate because you started your portfolio with a long-term view. But finally you decide to close these 7 positions with an average profit of 10% each. Isn't that nice! That remains to be seen... After all, everything depends on those other three positions. If you make an average loss of 30% on those, then you are nothing but a sitting duck. Skimming your profits based on a short-term vision but doing just the opposite for your losers is the recipe for ending your stock market adventure very quickly.

Finally...

Remember that fear is a bad advisor. To completely eliminate that fear, the most important tip in this post is the first one. Make sure you invest just enough so that you don't have to worry about it under any circumstances. Only by doing so you will achieve the full potential of a long-term strategy.

Trade Safe!

The ChartMill Team