Brace yourself, because your resolve to hold onto your stocks could get tested big time, and soon. With the S&P 500 Index dipping as low as 23% within the past couple of months, we've hit the ballpark of bear market territory. The index currently hovers around a 12% drop year to date, but there could be more pain on the horizon.
If you sell your shares, you won't get the advantage of the market's eventual recovery, so you'll need to buckle down and prepare yourself to hold out. Let's learn about three of the most common ways that bear markets create the very powerful temptation to sell so that you can resist the temptation when it calls.
1. Destroying some of the market's recent winners
The most visible way that the bear market is likely to test investors' resolve is by demolishing the stocks of companies that were not too long ago put forward as high-flying success stories. Take Moderna (MRNA -0.79%), for example. Its shares are down by 53.6% over the last 12 months, despite a powerful return of more than 1,430% over the last three years.
But the company's coronavirus vaccine is still selling heavily, and it's developing updated jabs to ensure it has something effective to sell for the rest of the year and beyond. On July 29, it announced that the U.S. government had placed a purchase order for more than $1.7 billion to secure the updated shots. And it's still expecting to make around $21 billion in sales this year. Per its earnings report on August 3, that expectation looks to be fully within reach and likely to be realized.
In other words, there's not much reason to suspect that the investment thesis for buying Moderna has changed by much between the start of the bear market and now. Even so, seeing its share price in the dumps is likely to make many investors question whether they should be thinking about selling. Further losses are all but guaranteed to have an even more intense effect. Inevitably, many investors will sell, and they might be missing out on significant future growth in the process.
2. Barraging investors with bad news
Bear markets tend to be characterized by an all-consuming swamp of pessimism. You've probably already seen the headlines flying around. Gas prices are still high, and everything is getting more expensive. There's an ongoing parade of economists, portfolio managers, and famous investors predicting that everything is bound to get worse in the market and elsewhere. And there's endless speculation about how the Federal Reserve's rate hiking policy is bound to crater your retirement account.
If you read the above and are now wondering whether it's worth pulling your money out of the market entirely and waiting for conditions to improve, your resolve is being tested, and you should take a step back and think for a minute. For many companies, the negative headlines about the market or the economy simply aren't relevant to their ability to generate revenue and compete effectively. For others, external events do indeed matter, but it's still entirely possible that the market overreacts when it comes to adjusting share prices in response.
In Moderna's case, there's not much in the way of ongoing relevant macroeconomic or geopolitical events that would affect its operations. It doesn't sell jabs to people directly, so trends like inflation leading to consumer wallets being under pressure don't matter. Likewise, it isn't directly subjected to rising costs from the prices of major commodities going haywire, like lumber or oil. Management is overtly optimistic about the coming quarters, even when taking the economy's issues into account.
Nor are the very general predictions of market observers likely to appreciate the unique tailwinds that it has over the next five years and beyond -- for example, its ability to rapidly develop and manufacture updated vaccines in response to viral variants.
That won't stop the bear market from peppering investors with gloom and doom about the economy and its effect on businesses, though. Tuning out the noise is a great way to keep your resolve intact.
3. Creating narratives that imply old investing rules and strategies no longer apply
Along with the regular flow of negative news, bear markets often see new and convincing narratives that explain how things in the market have changed such that investors who refuse to update their approach will be imminently devastated. It's true that successful short-term strategies need to adapt to shifting conditions. But if you're investing mostly for the long term (and you should be), the chances are very good that simply holding onto your shares is a better option than adopting a radically different approach.
Take the current narrative about rising interest rates being a death knell for investing in growth stocks as an example. The argument is that higher borrowing costs will make it much harder to grow. Now, think about Moderna, a company that in 2021 had free cash flow (FCF) of more than $13.3 billion, operating expenses of around $2.5 billion, and in the most recent quarter reported cash holdings of around $18 billion. It isn't a business that'll need to borrow money anytime soon.
So don't get rattled by the narratives. Think about whether your original investing thesis for the stock is still true, and hang onto your shares even when the bear market is trying to tell you that it isn't a good idea.
