Don’t let this cute face fool you. I’m going through what might be my very first bear market. It isn’t clear yet if it is a bear market or just a market correction, but since I started regularly monitoring my investments, this is the first time I’ve seen the account balance take such a huge plummet and it hurts. Is that why they call it a bear market? Because it hurts as much as if a grizzly bear bites you? I did go through the 2008 crash too, but it was different then because I was much younger, unmarried with no kids and I didn’t have nearly as much assets as we do now.
Still, I won’t let my emotions sway me. I’ll stay the course with my investments and financial plan as Vanguard founder Jack Bogle and other experts are reminding us.
A bear market is a market where prices are falling encouraging selling and is defined by at least a 20% drop in stock indices from its peak. While it is common for investors to panic and feel anxious (like me ahhhh!), if you have a good financial plan in place then just keep your eye on the prize. During these times though it helps to go over what to do with your investment portfolio during a volatile market, which incidentally is to do nothing.
Look at the big picture. Volatility and bear markets are a normal part of investing, but if you keep a long term perspective you’ll see the market is less volatile than it appears on a microscopic level and historically the market has positive returns over the long run. Incidentally, this is also a good reason why you shouldn’t buy those magnifying mirrors. Like you need to zoom in on every pore and blemish on your face. Have a financial plan in place that matches your goals and risk tolerance, stick to it and remember this too shall pass.
Don’t try to time the market. It’s hard and almost impossible to do. Not only do you have to time the entry into the market, the purchase price, but you also have to time the exit, the selling price. In order to get both right already makes you some kind of Houdini and even if you do get it right once or twice, over the long run you get it wrong much more often than you get it right and end up with less returns if any than if you had taken a passive, hands-off investing approach.
Consider dollar cost averaging. By regularly investing on a fixed schedule regardless of market conditions you mitigate some of the volatility of the market. The result is you end up with an average price per share that is lower than the price you paid if you invested a lump sum, because you buy more shares at lower prices and fewer at higher prices (is the logic). On a side note, according to my Vanguard advisor, he said the studies show that over a long period it doesn’t matter whether you invested using dollar cost averaging or a lump sum, you investment ends up around the same, which does make sense. But from a psychological standpoint, it makes people feel better to dollar cost average than to invest a large lump sum in the market right before a major decline. Don’t underestimate the power of the placebo effect.
Ok, so I feel a little better after reviewing these points. Just have to weather through this storm. Glad I have you one or two readers to go through my first bear market with me. Have any other good tips for weathering a volatile market? Share your thoughts. Til next time!