The Single Biggest Mistake You Can Make in a Bear Market

Investing during raging bull markets is easy. You can often simply buy growth stocks with solid prospects, sit back, and enjoy the ride.

Bear markets are a different story altogether for many investors. The onset of fear, uncertainty, and doubt can lead to taking steps that prove to be ill-advised. There are plenty of ways you can go wrong during major market declines. But here’s the single biggest mistake you can make in a bear market.

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Market myopia

If you wear eyeglasses or contacts, there’s a good chance that you’ve been diagnosed with myopia (nearsightedness). As a result of this condition, close objects appear clearly while objects farther away are blurry. Myopia can become worse by spending too much time looking at things up close.

A version of nearsightedness affects many investors during bear markets. We could call it “market myopia.” When you have market myopia, you can only clearly see the dismal current state of the stock market. The future becomes nothing but a blur.

Similar to the medical type of myopia, market myopia gets worse the more time you look at how your stocks are performing. It’s easy to focus on nothing but the short term and totally forget about the long term.

Market myopia is a totally self-inflicted condition and allowing it to occur is the worst mistake investors make in a bear market. Why? Because focusing only on the short term is the underlying cause of nearly every other mistake commonly made during market downturns, especially selling stocks at huge losses.

Two examples

Let’s look at a couple of examples of how having market myopia can be problematic. In both cases, we’ll examine previous S&P 500 bear markets.

The most recent S&P 500 bear market before the current one came in early 2020. Worries were mounting about the potential impact of the novel coronavirus. As countries across the world implemented lockdowns, the stock market plunged.

^SPX data by YCharts.

By mid-March, the S&P was officially in a bear market. Less than two weeks later, the index was down more than 30%. Investors with market myopia would have been tempted to get out of the stock market altogether. You might know some who did. I do.

But every investor knows what happened next. The doom and gloom quickly began to diminish. By late summer, the S&P had regained its previous high. The index ended 2020 up 16%. Fast-forward to the end of 2021. The S&P had soared nearly 50% since the beginning of 2020 and had more than doubled from its low point during the coronavirus bear market.

^SPX data by YCharts.

You might be thinking: “The 2020 bear market was an outlier. Most other bear markets last longer.” That’s entirely true. However, the same lessons can be learned from the Great Recession bear market of 2008 and 2009.

The S&P 500 index had drifted downward throughout much of 2008. In October, though, the bottom dropped out as news broke that large financial companies were on the verge of collapse. By the week before Thanksgiving of that year, the S&P had plummeted nearly 50% below its previous high.

^SPX data by YCharts.

If there was ever a time to be despondent about stocks, it was 2008. Market myopia was rampant. But then… you know the rest of the story.

The S&P went on a remarkable run. The bear market eventually ended. Even with the current market downturn, anyone who owned S&P 500 funds at the beginning of 2008 and held on would be sitting on a gain of more than 150%. The total return, including reinvesting dividends, would be much higher than that.

^SPX data by YCharts.

Three words that can make you richer

There are three words that can make you richer in both bull and bear markets: Think long term. But having a long-term perspective during bear markets can especially pay off.

The smartest investors do the same things in every bear market. Most importantly, they don’t fall victim to market myopia and panic. Instead, they make sure their portfolios are diversified. And they keep buying stocks regularly.

This approach has paid off handsomely throughout history. While the future might seem blurry right now, there’s no reason to think that it won’t be just as bright as in the past.

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