Have you been following the stock market? Usually, I don’t pay much attention to the stock market and only check when I update my net worth spreadsheet. I do that a few times per month. Lately, I’ve been watching the local morning news to see the weather report. The weather has been unusually cold this year. I need to see the morning weather update so RB40Jr can dress appropriately. He loves shorts so that’s his first choice, but shorts won’t work when it’s rainy and cold. As a side effect, I’m getting these snippets of stock market reports. The DOW is down 125 points after one hour of trading, etc… Honestly, it’s a bit distracting and not very useful.
*Originally written in 2014. Updated 2022.
The stock market is volatile
So what if the stock market is down? There are a lot of problems this year – inflation, the war in Ukraine, supply chain problem, Covid, and more. The stock market is down quite a bit so far. Most tech stocks are firmly in the bear market territory (down 20% or more). It can be stressful if you follow the stock market too closely.
The key is to avoid the news or don’t pay attention to it. If you worry about stock prices going down, you’ll give yourself an ulcer. The stock market is volatile and it will go up and down. That’s the fact of life. Nobody knows what the stock market will do tomorrow. Unless you’re a genius investor, there is no point in trying to time the market.
The average investor needs to change the way we look at volatility. Most of us are happy when the stock market goes up. It means we are getting richer. We are getting closer to financial independence, retirement, or a new car. I, for one, have been very happy over these last few years. The stock market performed very well for many years now and it feels good to see our net worth increase.
On the other hand, many of us tend to get anxious when the stock market heads downhill. Our net worth declines and we feel poorer every month. What if the S&P 500 drops 20%? Should we sell, stop investing, or just hold on tight?
Well, if you are younger than 60, the answer is simple – just keep investing. In fact, invest even more than usual. From 2008 to 2009, we lost over $200,000 in net worth even while adding as much as we could. It was scary, but I knew from experience that the stock market would recover at some point*. Since then, we have been in a long bull market. The loss was recovered pretty quickly and we made quite a bit of money.
Will 2022 be different than the previous bear markets? Things look bleak when you’re in the middle of it. However, the stock market will recover at some point. If you don’t invest now, you’ll regret it when you’re older.
*Historical performance does not guarantee future return. However, I still think it’s a great bet if your investing timeline is over 10 years. The stock market usually recovers from a bear market in less than 2 years.
Bear markets will make you rich
Sure, I get queasy whenever I see a big stock market crash, but I know it’s a buying opportunity. The bull markets make you feel good, but bear markets will make you rich. Don’t make the mistake of selling at the wrong time and missing out on the recovery. In previous bear markets, investors sell off their stocks and missed the recoveries. It is very difficult to time the market.
You have to be right twice.
- When to sell? Is this the bottom? Who knows? I don’t think so. The stock market probably will drop more this year.
- When to buy? It’s just as difficult to get back in the market. I’ve done this and inertia is very hard to overcome. The stock market can and does jump a bit and then drop a lot the next day. You don’t know when the real recovery will happen.
The best thing to do is to keep investing. Then you don’t need to stress about timing the market. Your chance of making a profit in 10 years is pretty much guaranteed.
What to do during a bear market
- Keep calm and minimize financial news.
- Stick to your asset allocation and rebalance once or twice per year.
- Keep investing.
- Invest even more if you can.
- Learn to love the bear markets because they will make you rich.
Do you have any tips for dealing with bear markets? I know it’s hard to watch, but it’s great for long-term investors.
Photo credit: flickr by nordique
Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.