Rising fears of an impending economic downturn have added to investors’ fears that things could continue to get worse. Beyond the traditional measure of stocks being at least 20% below the prior peak, last week’s piece discussed that the recent widespread selling appears to qualify it as a “real” bear market. This piece will provide three crucial rules for surviving and thriving after the bear market.
Rule number one: keep it all in perspective. While the natural instinct is to focus on the market being down by more than twenty percent from the recent peak, looking at a more extended timeframe can help frame the situation better. Over the last five years, $100 in the S&P 500 grew to $187, an annualized return of over 13%! This return far outpaced bonds and cash. And on the more critical point of increasing purchasing power, stocks rose significantly faster than inflation. Investors bled purchasing power if invested in bonds and cash.
Rule number two: avoid ruin. On a personal basis, this means that one should have enough liquid assets to cover living expenses over a reasonable period. Since bear markets have rarely lasted more than three years, that seems like a suitable place to start, but personal circumstances differ. The key is to position yourself so you are not forced to sell stocks at an inopportune time.
Rule number three: know yourself. Believe it or not, the human brain was not designed for financial markets. Our brains developed a long time ago with the express purpose of trying to keep us alive. For example, our first instinct is to flee when we feel fear. We are probably all here because our long-lost ancestors followed that feeling, so it isn’t all bad! That’s just one of many built-in biases that served us well in a different world but harm our decision-making in investing.
Challenging markets are never pleasant, but they are at the heart of why stocks have been the best-performing asset class over time. An investor can profit from the dynamism of the U.S. and global economy by owning stocks. Still, it comes at the price of dealing with the volatility of the market caused by the reactions and overreactions of market participants.
Read more about surviving and thriving after a bear market here.
By Bill Stone, Contributor at Forbes.
Published June 26, 2022