On June 13, 2022, the S&P 500 — one of the most popular indexes that tracks the largest 500 U.S. public companies — entered a bear market, dropping more than 20% from its early January 2022 highs. There are no foolproof plans that can save you during a bear market, but there are some things smart investors do to weather the storm. Here are three of them.
1. Don't panic
When the stock market enters a bear market, the first thing investors need to remember is that bear markets have shown to be an inevitable occurrence in the stock market. They've happened in the past, and assuming they'll continue to happen going forward is one of the safer bets you can make. The one thing you don't want to do in a bear market is panic. Panicking can especially be counterproductive if it causes you to sell your stocks just because of the dropping prices.
The goal should always be to buy low and sell high, not vice versa. If you're a ways away from retirement, you have time on your side to let the market rebound. Not every stock that drops in price eventually rises again, but history has shown us that the major indexes — such as the S&P 500, Dow Jones, and Nasdaq Composite — and the market as a whole tend to bounce back eventually.
2. Focus on diversification
“Don't put all your eggs in one basket” is a relevant saying in many aspects of life, and investing is no different. Diversification is one of the main investment pillars, and any solid portfolio should have a fair mix of assets. You never want to find yourself in a situation where the success or downfall of your portfolio is too reliant on too few stocks. Diversification is key to reducing some of the risks that come during bear markets.
If your portfolio is well-diversified, you may not experience the hypergrowth that can happen with single companies, but you're also not totally exposed to sudden drops that can occur. For example, having a good chunk of your portfolio in Netflix (NASDAQ: NFLX) may have been lucrative while it was going from just over $150 per share in June 2017 to over $690 per share in October 2021. But with it dropping close to 70% in 2022, such a portfolio mix could be detrimental.
3. Use dollar-cost averaging
It can be hard not to let your emotions involved when dealing with money under normal circumstances, but this is especially true during bear markets when you're seemingly losing money. To help with this, investors can begin to dollar-cost average, which involves making regular investments at set times, regardless of how stocks are performing at the time.
Not only does dollar-cost averaging keep you consistent because you invest at set intervals instead of stopping because prices are falling, but it also helps you lower your cost basis during bear markets. Your cost basis is the average price you've paid for a particular stock since you've likely purchased different shares at different prices over time. The lower your cost basis, the higher your profit when you eventually sell a stock.
The goal is to avoid a situation where you're trying to time the market; dollar-cost averaging helps with that. If you believe prices will keep dropping, it's hard to convince yourself to buy at today's price if the price will be lower soon. But you never know how long trends last; as an investor, one of the best things you can do is remain consistent and trust that you're investing in great companies and funds that will produce great long-term returns.
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