I've been investing in stocks for the vast majority of my life, and there's one thing that I know for certain. I have no clue what the market is going to do on any given day, or, in fact, in any given week, month, or year. This realization wasn't something I came to as quickly as I would have liked, but it has changed the way I invest. And, perhaps, the biggest takeaway is that I see corrections very differently today than I did when I was 20.
Corrections are normal, so don't panic
If you have spent any time investing, you've probably heard the saying that "past performance does not guarantee future returns." It's a safety valve of sorts for investment managers that are using historical performance to convince people to give them money. But it is a truism that is important to remember. Just because the market is going up does not mean it will keep going up. To quote another Wall Street saying, "Trees don't grow to the sky."
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Simply put, you will experience a bear market if you invest in stocks for any notable length of time. Don't let that scare you -- just brace yourself ahead of time. That could mean a number of things.
For example, you might want to diversify your portfolio by putting some of your money into stocks and some into bonds. Bonds tend to be less volatile over time than stocks, so they can provide a ballast during deep market downturns. You could also include boring, dividend-paying stocks, like utilities, that tend to hold up well when more growth-oriented stocks are faltering. As the chart below shows, utilities aren't exciting, but that can be exactly what your emotions need while the broader market and high-growth sectors are gyrating.
Some investors also like to include hard assets in their portfolios, like gold. This type of investment should normally only make up a few percentage points of a portfolio. Still, when markets are in panic mode, the safety of precious metals often gets popular. The chart below shows what happened during the bear market in 2020, which was driven by the coronavirus pandemic. Gold was a clear safe haven during that market dislocation.
One last piece of advice here is to ignore the financial media. Their job is to get you excited so you watch their station, but that just leads to emotional distress during bear markets and irrational exuberance during bull markets. You'll be better off focusing on the fundamentals of the companies you own rather than paying undue attention to the broader moves on Wall Street.
Change the narrative
Speaking of company fundamentals, bear markets can be among the best times to buy stocks. But when everything around you feels like it is crashing and burning, and the media is playing up the story, it can be hard to act rationally. If you prepare ahead of time, knowing that eventually you will suffer through a market correction, you can set yourself up for success.
This is easier said than done, but you just need to tell yourself that great stocks go on sale during bear markets. What I do is keep a list of stocks that I would really love to own if only they were cheaper. I'm basically looking for companies with long histories of annual dividend increases, strong business models, and great leadership. I check in on some key stocks every so often, just in case something company-specific leads to a stock drop. But when there's a bear market, I pay extra attention to the list.
I'm basically trying to shift my mindset. Instead of seeing a downturn as a time to be afraid of losing money, I try to see it as a time to make money. It's hard to buy when stocks are heading lower day after day. But ever since I made the decision to focus on companies and not the market, I have actually managed to buy what I consider great stocks when others are selling them. Most recently I've added to names I already own when there's a correction in a broader sector, like real estate investment trusts (REITs).
Be prepared and you won't be surprised
Whatever path you take here, and I'm sure there are more you could choose, the key point is to be ready for corrections. They happen, and you will have to deal with them. Knowing that fact up front means you can do something before you are staring a bear market in the face. My personal plan includes diversification and having a wish list ready ahead of time. Whatever you choose to do, just make sure you do it ahead of time or you'll likely fall into panic mode. That's not where you want to be during a bear market because it increases the chance of you making an investment mistake.
