When the market is down as sharply as it has been in the first part of 2022, investing can be incredibly scary. It almost feels like you're throwing good money after bad as every time you make a deposit, you see a huge chunk of it seem to evaporate before your eyes.
And as you watch your account balances shrink, it's almost as if your future goals are slipping away before your eyes, too. Yes, when you look at your investments vs. a bear market, it can be ugly. Still, there's a reasonable strategy you can use to come out on top.
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First: Get your financial house in order
Bear markets often bring with them job losses. Even if you keep your job, life happens, and unexpected costs may show up at a time when your stocks are down. As a result, it's important to have an emergency cash fund in an FDIC-insured account just in case. No, you won't earn a huge return on that money, but you'll have an extremely high likelihood of the cash being there if you need it. That can dramatically reduce your risk of being forced to sell your stocks when they're down in a bear market.
In addition to the emergency fund, it's critical to get your debts under control. It can be OK to invest when you have debt, but that debt really should have three key characteristics:
- It should have a low interest rate. It makes no sense to borrow money at a higher rate than you can reasonably expect to earn on your investments over time. Even if it's close, paying off your debt has a guaranteed rate of return, while the stock market's returns are never guaranteed.
- It should have a payment you can afford without wrecking your lifestyle. It's tough enough to invest in a healthy market, but when the bear comes growling, the stress of a hefty payment makes it even harder to make smart decisions.
- It should play a key role in your future. If your debt offers you something critically important -- such as a place to live, the opportunity to earn a living, or something you need to sustain your life -- the benefits may very well be worth the risk vs. the costs of keeping the debt.
Next: Recognize what stocks really are
When all is said and done, a share of stock is nothing more than a partial ownership stake in a company. That share gets its value based on the company's performance and prospects over time.
As its share price drops during a bear market, ask yourself why it's dropping. It could be because the company's future has soured or because the market is simply scared. If the company's prospects still look strong but its stock price is weak, you just might have a legitimate bargain on your hands. Using a valuation technique like the discounted cash flow model to seek out those bargains can help you deliver better.
In that case, a bear market can actually be a good time to pick up more shares of a great business at an inexpensive price. That shift in perspective to focus on the business instead of the shares can go a long way toward helping you calm your nerves and make smarter long-term decisions.
Finally: Realize that nobody gets it right every time
Although investing can be a great way to build wealth over time, no investor gets it perfect, not even Warren Buffett. You will make mistakes. In addition, even if your process is sound, sometimes companies' prospects will suddenly sour.
As a result, it's important to have a diversified approach to your investments. Diversification won't keep bad things from happening to your portfolio. What it can do is reduce the impact a single company's stumble will have on your overall portfolio. That's an important part of being able to stay invested during a bear market and giving yourself the best chance to emerge in a better spot on the other side of one.
Mix it together with a long-term focus to beat the bear
When you combine a solid personal financial foundation with a value-based investing approach and a healthy respect for diversification, you have a powerful toolkit for beating a bear market. Just remember that it will likely take time for the market to come to its senses, so have the patience to let your shares do their thing.
Over the long haul, a company's market price should respond to its fundamental business strength, not just the market's sentiments. With the patience to let that process play out, you can ultimately put that bear market behind you.
By making today the day you put these pieces together, you set yourself up with a great toolkit for coming out on top of a bear market. The sooner you get started, the sooner you can actually start fighting back. So, start harnessing the power of your inner bear fighter now.
