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Investing in the stock market is all about delayed gratification. Instead of spending money, a person can acquire stakes in companies in the hopes that the majority of those companies grow to become more valuable in the future than they are today. The objective is very simple. But people get it wrong all the time. Especially during a bear market.
During a bear market, falling asset prices can lead to some great deals. But when the broader indices are down 15% to 30% and continue sliding, it’s going to be very hard not to lose money in the short term. While we all wish we could snag a stock at the exact time it bottoms, the reality is that this is incredibly hard to do. And you should ignore anyone who claims it’s easy.
Rather, the goal during a bear market should be to put money to work by building positions in companies you believe in — even if those positions go down in the short term. Here’s a look at the dangers of trying too hard to make money in a bear market, and a better approach you can take to get wealthy over the long run.
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The pitfalls of trying to make fast money in a bear market
Believe it or not, trying to make money in a bear market is usually one of the best ways to lose money. Trading in and out of stocks, shorting stocks, employing hedging strategies, and buying into sectors or companies you don’t understand are all examples of what some folks try to do in a bear market. There’s no denying that shorting the S&P 500 would have been a great trade so far in 2022. That’s simply a fact. But is it a great investment or use of capital? Probably not.
No one knows how much further the market could fall. But we do know that betting against the U.S. economy has been a losing strategy over the long run. By shorting the S&P 500, or let’s say, selling all your stocks and investing solely in gold and oil and gas stocks, you’re effectively betting that the long-term return of the overall stock market is going to be worse than gold and oil and gas. It could happen. But it’s unlikely.
Now, that doesn’t mean an investor shouldn’t own some gold or oil and gas stocks. In fact, there are a few oil and gas stocks like Chevron or ConocoPhillips in particular that stand out as good buys now. Or even a utility like NextEra Energy (NYSE: NEE) that is tied to oil and gas and renewable energy. Rather, the point is that it’s usually a mistake to scramble to find what is working in a particular bear market and then shift your investing strategy according to that trend.
It’s worth mentioning that the same is true in a bull market, too. Investors who switched out of value stocks and oil and gas into growth and renewable energy in 2020 and 2021 missed out on the gains in value stocks and the energy sector this year. By switching into growth stocks at their peak, an investor would have missed out on the largely uninterrupted gains that growth stocks enjoyed from 2009 to 2021 and instead just gotten the losses in 2022. Similarly, the worst three sectors of the stock market in 2020 — which were energy, financials, and real estate — ended up being the best three sectors in 2021. This is all to say that gravitating toward the slickest strategy or the shiniest stock is usually a great way to lose money. Rather, an investor should find businesses with attractive financials and long-term growth prospects and invest in those companies no matter if they are in favor or out of favor in a particular year.
The more profitable approach
The best and simplest strategy in a bear market is to find name-brand companies that you understand and are interested in owning over the long term and invest in those companies even if it means more downside. While it may be tempting to go and find a downtrodden company down big off its high that could go up five- or tenfold over the next few years, the far easier strategy is to simply stick with industry-leading companies that are down big off their highs but also have plenty of long-term growth.
One reason so many investors miss out on excellent buying opportunities in a bear market is that they are afraid to lose money. And if you’re afraid to lose money, then it’s going to be hard to hit the buy button when stocks seem to just go lower.
The sooner an investor gets comfortable with volatility, the sooner they can begin to build a portfolio that their future self will thank them for. Remember, investing in the stock market is all about delayed gratification. In the end, it’s not going to matter what your portfolio is worth tomorrow, at the end of the year, or even next year. Rather, all that really matters is that you’re building lasting wealth by letting the power of compound interest work its magic. It surprises most people to learn that $10,000 invested every year for 50 years at a 10% annual return (without factoring in taxes) would turn into — wait for it — $11.64 million (even though the total deposits over that time frame are just $500,000). The price of admission for those returns is patience, the ability to not lose your cool during a downturn, and the discipline to continue saving money.
Focus on long-term wealth
Making money or beating the market every year isn’t the objective for investors. You don’t have to try to rethink your entire strategy all because the market is down. And you don’t have to make a brilliant decision to become incredibly rich all at once. Rather, you just have to make decent decisions consistently. By focusing on the big picture, an investor stands a better chance of thinking clearly and making choices that prioritize their long-term financial health.
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Daniel Foelber has positions in NextEra Energy and has the following options: short January 2023 $75 calls on NextEra Energy. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
