Bear markets can seem scary to investors, and for good reason. No one likes to see the market fall 20% or more. And most people who are invested see the value of at least some of their investments decline during a bear market because broad market indexes don't usually fall by that much without the share price declining for a lot of companies.
But while the very words “bear market” can strike fear in many, they aren't a source of concern for me.
In fact, I've actually increased the amount of money I put into stocks in each of the bear markets that have occurred since I started buying stocks. And when the market sees major declines again and we inevitably find ourselves in a bear market sometime in the future, I plan on doing the same at that time, too.
Here are three big reasons why.
1. Because I don't know when the bear market will end
The biggest reason I keep investing during a bear market is because bear markets are usually followed by bull markets. If I stop investing when stock prices are falling, I risk not getting my money in before the recovery begins.
Most people are really bad at predicting when stock prices will start climbing again during a bear market, especially because bad news often looks worse when you're in the middle of an economic crisis.
Unfortunately, trying to time things perfectly could mean missing out on tens of thousands of dollars of potential gains. In fact, data from Fidelity revealed that investors who put $10,000 into an S&P 500 index fund between 1980 and 2018 would have missed out on $232,522 in potential gains if they missed just the five best investing days over that period of time.
Since stock prices can fluctuate even more dramatically than the price of index funds, buying in just a few days late could have an even more dramatic impact. That's why I don't try to time the market at all, and I buy both stocks and index funds on a steady basis using dollar-cost averaging.
2. Because I like to buy good companies at a discount
During a bear market when the prices of stocks start to fall, I actually begin investing more money whenever I can.
While this may seem counterintuitive, it makes sense because the market downturn provides an opportunity to buy shares of great companies at a reduced price.
During a bear market, the share price of high-quality companies often falls because people react and panic-sell based on short-term fears. As a result, it's possible to score discounts on shares of businesses that will easily weather the storm and come out better in the end.
The ability to buy at a bargain during a bear market is one reason Warren Buffet has said that he prefers to be “greedy when others are fearful.” In both of the last two bear markets, I upped my stake in a few of my high-conviction holdings considerably, and it's paid off big time for me in terms of maximizing my return on investment.
3. Because I have a long investing time horizon
Although I have some money in a taxable brokerage account, most of my portfolio is in various IRAs that I won't be accessing for at least 20 years. Since I won't need the money right away, it doesn't much matter to me if my investments suffer short-term losses on paper.
I focus mostly on index fund investing, but I invest a portion of my portfolio in stocks of companies that I believe in. I choose these companies based on their competitive advantages, solid leadership teams, high-quality products or services, and my confidence that they can stand the test of time. None of those factors really change just because we enter a bear market.
Since I'm interested in how my portfolio will perform over multiple decades and I believe in the stocks I own, I don't worry if it looks like the value of my investments is temporarily falling. And I don't worry about buying during a bear market and seeing the share price fall immediately.
I have complete confidence that over time, the companies I believe in enough to invest in will perform well for me whether I buy my shares during a bull market, a bear market, or both.
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.