15 Mistakes to Avoid During a Bear Market

After the market dipped back into bear territory earlier this week, investors are on pins and needles waiting for the next bout of volatility to strike. If we do experience another full-scale bear market before the end of 2022, here are 15 common mistakes to make sure you avoid.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

While it might be tempting to give up on the market altogether after a prolonged period of extreme volatility, investing decisions made on the basis of extreme emotions like fear (or greed) are not an effective game plan for your portfolio nor are they likely to produce the desired result. Instead, you might end up widening rather than mitigating your losses during a market crash or correction.

ALSO READ: Should You Invest in the Stock Market Right Now or Wait?

Here's the thing: When you look at your portfolio during a market downturn, there's no denying that sinking feeling that arises as you watch your favorite companies dip to historically low valuations. However, if you do cash out in an effort to stem the hemorrhaging, you will turn short-term movements in your portfolio -- "short term" meaning when your investment horizon for any stock is no less than five years -- into absolute losses from which it might be extremely difficult to recover.

The thing about bear markets is that no one knows exactly when they will happen, but they do. Historically, the market enters bear territory every few years, and this period may last for a very short duration (e.g., weeks) or extend into many months. Stick to your investment strategy and goals, continue to diversify, and if emotions are high or you don't have much extra capital to invest, it may be wiser to leave your portfolio alone for a time.

ALSO READ: In Long-Term Investing Strategy, Market Volatility Should Be an Afterthought

Investors have heard it all from market soothsayers with wide-ranging claims about what stocks will or won't do in the months ahead. While some of their predictions may or may not come to fruition, it's important to remember that although fear sells (and makes for compelling headlines), fear is never an emotion that will serve you well as an investor in any market, bear or bull.

During a market downturn, it may be tempting to jump on the bandwagon of any number of hyped investments as a means of rapidly recovering losses experienced during a correction or crash. Unfortunately, speculation is not a winning strategy, and the broader losses that investing based on hype could produce may easily outlive and outweigh any short-term gains you might experience.

It's certainly an exciting time to buy into innovation, but it's also important to ensure that there's an intact and robust thesis underpinning a company or prospective asset that supports the wave of hype driving investors toward it.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

"But investing isn't about beating others at their game. It's about controlling yourself at your own game," Benjamin Graham wrote in The Intelligent Investor, his 1949 book about value investing. In other words, staying focused on your long-term investing and financial goals, as well as the steps you need to take to get there, is key to remaining aligned with your investment strategy and avoiding being sidelined by fear or greed signals in choppy markets.

ALSO READ: Stock Market Downturn: 1 Effortless Way to Avoid Losing Money

While fear can drive some investors to sell all their stocks, it can cause other investors to be too afraid to do anything with their portfolio. In the moment, there's no denying that a market crash or correction isn't fun. At the same time, when looking at the bigger picture and your broader investment goals -- which should extend far beyond the life span of any bear market -- these periods often present some of the best opportunities to buy excellent businesses at incredibly cheap valuations.

In short, if you have cash available that you don't need in the near term and can invest and hold in your portfolio, don't be afraid to put it to work to your advantage.

During the current inflationary period as concerns over a recession continue to loom, it's more important than ever to ensure you have money set aside for any unexpected events that may arise. Life is unpredictable, and you never know when you might have a financial need arise that would require you to tap into that fund. However, your rainy day fund should not in any way be connected to your portfolio, but it should be money that you set aside separate from it for emergencies.

ALSO READ: How Much Money to Keep in Savings

During a period of market volatility such as investors have been experiencing in recent months, you've likely seen more than a few less-than-favorable headlines about the companies you own or follow after a bumpy quarter or as sentiment on Wall Street wavers around a particular trend or sector. While declining investor sentiment may be driven by legitimate secular or business-related headwinds, it's especially important to ensure that your choice to buy or sell a stock is founded upon healthy and well-reasoned analysis.

If you're low on investing capital, it's rarely a good idea to tap into your nest egg or emergency fund to generate more cash to buy stocks with. Generally speaking, you shouldn't invest cash that you think you'll need anytime soon.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

While it would be nice if one could accurately predict the true bottom of any bear market -- and plenty have tried -- attempting to forecast what the market will or won't do next is a game that few if any investors can ever hope to win.

ALSO READ: Despite the Largest Fed Rate Hike in Decades, 1 Stock Steered the Dow Higher

Even if a bear market does occur, there's no need to rush to make swift changes to your portfolio. The good news is, you don't need to play guessing games or implement elaborate strategies to build a winning portfolio. It's much simpler than that: Invest in a variety of great companies, hold them for years, and continue to invest in all types of markets. You can also implement a temporary moratorium and do nothing for a time until the market stabilizes and/or you feel comfortable adding to your holdings.

Think about it this way: In any bear market, no one knows exactly when the market will hit the bottom and start to recover. In fact, it would be nearly impossible for anyone to time the best possible moment to get in or out of the market. In attempting to do so, you may not only erase years of work on your portfolio by selling all your stocks but put yourself at a distinct disadvantage if you try to reenter the market later, compared with other investors who stuck it out through the volatility.

ALSO READ: Worried About a Recession? Do These 4 Things to Prepare

The market is cyclical and constantly moving. And in this market, a stock that's down by mid-to-upper single digits one day may be up by the same or more the next. This is a simple but often hard habit to break, but checking your brokerage every day or multiple times a day can feed into negative emotions that might drive investing decisions you regret later. Try to limit how often you check your portfolio to once or twice a week, especially during a bear market period.

Don't be afraid to utilize investing options like fractional shares and dollar-cost averaging to get the most out of your capital while continuing to diversify your holdings, even with a more modest amount of liquidity to invest.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

The investor Shelby M.C. Davis once said, "History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable." No one likes a bear market, and it's natural to feel unnerved when they occur.

Whether or a not another full-fledged and prolonged bear market awaits investors is anyone's guess, but that doesn't have to put you at a disadvantage. In fact, if you're an investor with a diversified portfolio, a long-term investing horizon, and the patience to invest -- and stay invested -- in both the highs and lows, a bear market can actually work to your advantage.

The Motley Fool has a disclosure policy.