For most investors, the past 12 months in the stock market have been rough, to say the least. And trust me when I say that I'm far from an exception. While nobody likes seeing their portfolio drop, history has shown down markets are virtually inevitable (and some would even say necessary).
It's not the first bear market to happen, and I'm willing to bet my last two quarters that it's not the last bear market that will happen. The smartest thing I did during this bear market, aside from coming to terms with the fact bear markets are inevitable, was leaning on dollar-cost averaging.
Image source: Getty Images.
Embrace the inevitable
To give you an idea of the stock market's volatility, let's examine the S&P 500. The S&P 500 tracks the largest 500 public U.S. companies and is the primary benchmark for the stock market. So much so that the "market's performance" is often used interchangeably with the S&P 500's performance.
Since its inception, the S&P 500 has had negative years roughly a quarter of the time. Below are the negative years its had since 2000.
| Year | Yearly Return |
|---|---|
| 2000 | (9.10%) |
| 2001 | (11.89%) |
| 2002 | (22.10%) |
| 2008 | (37.00%) |
| 2018 | (4.38%) |
| 2022 | (18.11%) |
Data source: S&P 500.
For comparison, here's roughly how the S&P 500 has performed since each above year (minus 2022).
| Year | Yearly Return | Return Since |
|---|---|---|
| 2000 | (9.10%) | 195.08% |
| 2001 | (11.89%) | 245.66% |
| 2002 | (22.10%) | 339.95% |
| 2008 | (37.00%) | 355.33% |
| 2018 | (4.38%) | 51.15% |
Data source: S&P 500.
Understanding that bear markets are inevitable is important because it helps you look past the short-term negative and focus on your long-term goals. If time is on your side and you can focus on the long run, bear markets become opportunities instead of problems.
Look for opportunity in the madness
If you made a lot of investments in the years leading up to this latest bear market when many stock prices were overvalued, then now may be an opportunity to lower your cost basis. Your cost basis is the average price you've paid per share of a particular stock. For example, if you bought 10 shares of a stock at $200, your cost basis would be $200; if the price dropped to $150 and you bought 10 more shares, your new cost basis would be $175.
Cost basis matters because it ultimately determines how much you gain (or lose) when you eventually sell shares. With prices dropping during the bear market, you can grab some great companies at a "discount" and potentially lower your cost basis on stocks you already own.
Warren Buffett advises investors to "be fearful when others are greedy, and greedy when others are fearful," and bear markets generally indicate that investors are fearful. Instead of shying away from investing, here's the time to embrace falling prices to set yourself up for long-term gains. If you liked a stock at $200 per share, you should really like it at $150 per share.
Consistency is the name of the game
With the exception of a few months in the early stages of the COVID-19 pandemic, the stock market has largely been in a bull run the past decade. It was much easier for me mentally to invest during a bull market because my investments were seemingly increasing by the week. In fact, I wanted to invest as fast as I could so my money could have a chance to grow.
It wasn't quite as easy in the early stages of this current bear market. Against my better judgment, I sometimes found myself thinking, "why invest now when you can wait for prices to drop some more and get more bang for you buck." And to be fair, that makes sense in a logical world. But the stock market doesn't always operate logically. That's why I leaned more heavily on dollar-cost averaging.
Dollar-cost averaging involves investing on a set schedule with no regard for stock prices at the time. For example, you could decide to buy shares of an S&P 500 index fund every Monday, and when Monday comes around, it's your job to invest no matter what. In my case, I put myself on a schedule to make bi-weekly investments.
Using dollar-cost averaging and putting myself on a schedule ensured I stayed consistent with my investing instead of waiting for a "good" time. It also helped me ignore the stock market's short-term price fluctuations. Since I was on an investing schedule and price was irrelevant to whether or not I made my bi-weekly investments, there wasn't a need to keep up with the volatility. Talk about peaceful.
