The 3 Charts You Need to See in a Bear Market

I get it. There’s a lot of stuff going on in the world that makes it hard to be optimistic about investing. Everything seems to be getting more expensive by the day, society is trying to put a pandemic in the rearview mirror, and there’s a geopolitical conflict going on in Europe.

The stock market is reflecting these unpleasant truths: The Nasdaq Composite has been down as much as 20% from its high in recent days (it’s currently down about 18.6%), enough to officially put it in “bear market” territory. Meanwhile, a handful of smaller growth and tech stocks are down as much as 50%, 60%, and 80% in some cases!

Image source: Getty Images.

How can investors cope?

We are all human, and it’s understandable to be afraid. Famous investor Peter Lynch once said that “in the stock market, the most important organ is the stomach. It’s not the brain.” In other words, finding great stocks isn’t the hard part of investing, especially when there’s so much information available today. But when otherwise good stocks keep going down day after day, the emotional toll they can have can be difficult to handle.

That’s why I wanted to write this article, to encourage you by putting some things in perspective. It’s true, nobody can predict the future, and nothing in life is guaranteed. However, looking at some important charts can illuminate the “big picture” that can help you get through these challenging times as investors.

The market you see today

When you’re an investor, you see a whole lot of down days with the occasional bounce sprinkled in. The Nasdaq reached bear market levels because of several factors, including the issues already mentioned.

^IXIC data by YCharts

Don’t feel bad that your investments have lost money; virtually everyone that has touched growth stocks over the past several months is having a similarly bad experience in the market right now. However, most people will argue that they are long-term investors to build wealth over time, so why do investors focus so much on the market’s short-term movements?

Journey to a time not long ago…

If you rewind to just three years ago, the Nasdaq is up more than 60%, including the recent decline! During that time, investors have experienced a global pandemic, impacting society and the economy more than arguably anything in recent generations!

^IXIC data by YCharts

Despite a catastrophic event like the COVID-19 pandemic, the market has not only recovered from the deepest of its declines in March 2020, but it’s soared to new heights. Recent events matter and people are feeling the real-life consequences, but the fear during these times can cause investors to underestimate how resilient the stock market is.

Mr. Market has been “here” before

Zoom out even further to capture generational challenges the world has faced like the financial crisis in 2008 to 2009 or the early-2000s “dot-com” crash — in fact, pick any event in history. The result has been the same every time so far, and that is a market that eventually recovers and proceeds higher. Throughout what could be a long investing career, these crises eventually look like small bumps in a chart that moves up and to the right.

^IXIC data by YCharts

That’s not to say that you should be reckless in the meantime; investors should always manage their risk by using a diversified strategy that fits their investment goals. You shouldn’t need money invested for near-term purchases or expenses, and you might want to consider using a dollar-cost averaging strategy to ease into quality stocks during a bear market.

However, if investors keep a positive mindset, history has shown that the current challenges we face shall pass in time. Investing to maximize your potential returns isn’t always “comfortable.” It can feel “safe” to buy when stocks keep going up every day, but the pendulum always swings the other way eventually. Being prepared and having perspective about the stock market’s history can help you get through the toughest of times.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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