It's hard to sit idly by and watch your investment portfolio decline. But the best course of action in a bear market is often taking no action, paired with dollar-cost averaging at lower prices over time.
Investors looking for ways to expend nervous energy have come to the right place. Here are five steps you can take right now that should help you gain control and chart a path toward financial well-being.
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1. Make a watch list
It's easy to run out of cash during a bear market if you've already bought the dip on many of your favorite stocks. Instead of bouncing in and out of stocks to try and catch the best deal, a better approach is to make a watch list of companies you'd love to own once you have the means to do so.
A watch list chock-full of excellent stocks at bargain-bin prices produces a defined goal. It also adds an incentive to increase your savings rate and save with a purpose. It takes a level of randomness out of the equation because you've predetermined what to buy. And a watch list aids in keeping savings and investments on track, helping you avoid getting caught up in the heat of the moment and making impulsive decisions -- which is all the more dangerous in a bear market.
2. Think five-plus years out
Similar to a watch list, thinking five years out is a great way to sidestep the pitfalls of market volatility. Too much noise can lead an investor to overweight what's going on in the economy right now or next quarter. Inflation could persist for longer than expected. But eventually, the business cycle should normalize, and the economy should return to growth.
In this vein, the objective is to find companies that can get through this period -- even if earnings and margins come down -- and sustain long-term growth. Those are the kind of companies that should be added to a watch list.
3. Understand that volatility is simply par for the course
Every bear market is different. But generally speaking, the stock market does go down for good reasons. In this case, inflation, rising interest rates, ongoing supply chain issues, geopolitical tensions, and a slowdown in economic growth are all headwinds that tend to be bad for businesses. Given the weak short-term outlook, it makes sense that stocks would go down -- or at least stop going up.
However, it doesn't seem to make sense that many strong businesses have seen truly huge losses. A great example is e-commerce and cloud-infrastructure leader Amazon (AMZN +3.47%), which is down over 40% from its all-time high. The company is facing some challenges, but they don't seem large enough to justify such a big downward move in the stock price.
Especially for new investors, the idea that a well-known global company's value like Amazon's can whipsaw by hundreds of billions of dollars in a matter of months, or even weeks, can seem jarring. But volatility is simply the price of admission in the stock market. The sooner an investor accepts the inevitability of volatility, the easier it will be to buy and hold stocks and unlock the power of compound returns over time.
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4. Try not to get caught up in the day-to-day price action
When prices move quickly, it's hard not to keep up with the day-to-day price action. A good rule of thumb is to only check the market if you are about to make a decision, such as putting savings to work and buying a stock on your watch list. If you're not about to make a decision, then checking the market does little good other than promoting worry or false confidence.
5. Prioritize your financial health and well-being over the market's performance
One reason why people frequently check the market is because they compare their own portfolio's performance with the S&P 500's or the Nasdaq Composite's instead of focusing on their long-term goals. Healthy competition is good. But at the end of the day, all that matters is that you are taking advantage of the power of compound interest over time and using it to grow closer to reaching your financial goals and building a large enough retirement nest egg.
Benefits of making a plan now
A silver lining of this bear market is that it will be a great learning experience for newer investors. But for now, the bear market sell-off may get worse before it gets better.
By making a plan now, an investor can stay a step ahead of the sell-off and face further volatility with a level head instead of getting swept away in the chaos.
