Some say you learn more from your failures than your triumphs, and I can confidently say that 2022 was the biggest failure in my life as an investor. Thanks to the current bear market, I'm sitting on unrealized losses (meaning I haven't sold my shares) so significant that you should probably refer to me as bear food moving forward. I got chewed up and spit out.
But don't feel sorry for me. I've learned a ton through this bear market, and I want to share my major takeaway with you so you can avoid my pain. And no, the lesson isn't to pick different stocks, buddy! This will apply to virtually every portfolio, whatever your investment strategy.
When buying the dip doesn't work anymore
Recency bias is a pain. It's the psychological phenomenon that causes your mind to favor more recent events versus what happened further in the past.
I've been an investor since the late 2000s and came of age during the Great Recession over a decade ago. Most will agree that the bull market that started after the market's low in 2009 and lasted until the pandemic was a fun time. Buy the dip became a mantra, because seemingly every speed bump in the market was eventually met with new highs.
Image source: Getty Images.
My big mistake was letting myself expect the market to rebound. I bought shares every time a stock fell 5%, thinking how these dips would prove easy money. Of course, as growth and technology stocks -- where my portfolio is concentrated -- dipped further over the past 18 months, I kept buying the dip, again and again -- until I ran out of capital. Unfortunately, stocks kept dropping, putting me in the position I'm in now.
As I sit on my hands with no money to invest, I fear that recency bias will come for a new crowd -- those who begin expecting every market rally to lead to new lows. Unfortunately, some investors will deny the market's turnaround until Wall Street is again celebrating new milestones. Moving too quickly can be a huge mistake, whether you're bullish or bearish on stocks.
How do you defeat recency bias?
Don't just tell yourself that next time will be different, because chances are slim that it will be. Emotions are powerful; buying the dip worked for a decade before it came back to slap me upside my portfolio. You must protect yourself from yourself.
Image source: Getty Images.
As I slowly accumulate new funds to put to work in the market, I will use this experience to force myself to deploy money much more slowly. In other words, I'll be using dollar-cost averaging. You divide how much you plan to invest into small increments, tiny purchases you make slowly to build a position over time. That way, you prevent yourself from jumping into a stock too soon.
You might not buy at the bottom, but it should help keep you from piling into stocks only to watch your investment fall 65% below what you paid. Remember that markets go up and down in the short term, but bull and bear markets don't move quite as fast. On average, a bear market lasts more than nine months, and bull markets last almost three years. You have time to buy slowly and still make money.
