With the pundits, talking heads, and finance influencers producing a constant stream of stock market “analysis,” it can be difficult to keep your cool when the market is nose-diving. Ironically, the decisions you make during periods like this can have some of the biggest implications on your long-term success as an investor.
With that in mind, consider these three methods for keeping a level head during a bear market.
1. Don't check prices daily
Not checking prices on a daily basis is a lot easier said than done. But numerous studies have shown, as a species, we respond twice as negatively to losses as we do positively to gains.
This loss aversion causes us to make irrational decisions when things are going poorly. By constantly checking the prices of your stocks, you're putting yourself in a greater position to sell for emotional reasons rather than logical ones.
This concept is supported by a study conducted by Nobel Prize-winning economist Richard Thaler back in 1997. Thaler observed two groups of investors. One group was given a constant feed of data and information, while the second was fed very limited information. In his findings, he wrote, “The investors who got the most frequent feedback (and thus the most information) took the least risk and thus earned the least money.”
While the study is old, human behavior has not changed. A near-constant stream of feedback makes you a worse investor, especially when the market is down and loss aversion is high.
2. Revisit your reasons for owning stocks
If you're investing in individual stocks, it's a good idea to do an annual audit of your thesis for owning each one. When the market turns bearish, it might be a good idea to move that review up and revisit your original reasons for buying the companies in your portfolio.
This will do one of two things:
You'll have renewed conviction in your thesis and realize the decline in prices is likely a buying opportunity; or
You'll realize your thesis was not perfect or is perhaps broken.
If you do own broken companies, it's incredibly important to identify them as early as possible so you can cut your losses. Doing this also makes you a better investor, as it forces you to bolster your research process to come up with stronger theses in the future.
Peter Lynch famously said, “Know what you own and why you own it.” This is so incredibly important during a bear market because your conviction is the key to continuing to hold great companies through the downturn versus selling for a loss and subsequently also missing out on the recovery.
3. Look for opportunities
If you had invested in the S&P 500 right before the crashes of 2000 or 2008, it would have taken you five and seven years, respectively, to get back to even on your investment. It is much worse if you invested in the Nasdaq.
While there's nothing you can do about the cost basis of investments you made right before a crash, you can lower your overall portfolio cost basis by looking for opportunities while the market is in panic mode.
In fact, this is the best time to be a buyer — when the market is a flash sale.
Looking for buys forces you to think about the future, not the past investments you made that are underwater. Once you shift your mindset, you'll start to get excited by red days, because it means great businesses just became cheaper.
This is, again, a lot easier said than done, but nonetheless a key component of staying levelheaded during a bear market.
Look to the future
Crashes are incredibly painful times for investors. But history tells us they are regular occurrences, so if we're going to be long-term investors, we need to learn how to deal with them.
The key is in looking forward, not backward. This doesn't just apply to your portfolio, either. The best remedy to the bear market blues is to allocate time to something exciting outside of investing. Learn a new hobby, start a project with your kids or spouse, or get outside and enjoy nature.
In short, the market can be a rough place if you make it everything. But diversifying your time and having the mindset that crashes are regular, oftentimes healthy occurrences alleviates some stress. And ideally, that will let you see the silver lining: The best companies driving the future of American ingenuity are now much more affordable.
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