The current stock market looks scary with so many uncertainties, and there are some good reasons why investors stay away from the stock market.
Russia’s invasion of Ukraine has had a ripple effect across the globe, adding to the stock market’s recent woes and spooking investors.
However, long-term investors need to learn how to let their money work for them and stop sweating over the volatility in the market.
One of the ways to do this is to first look beyond the current geopolitical tensions. It’s true that no one enjoys watching the value of their investment portfolio go down.
But the pullback in the stock market offers opportunities for investors to put their money to work for the long run, while stocks are trading at a discount.
Bear markets are normal
Most people don’t like to experience a bear market. I hate it myself but it’s more common than we realise.
In fact since 1900, there have been 33 of these bear markets in the US.
Here are some of the notable examples that some of us might remember.
Dotcom Bubble of 2000
Most of us will remember the Dotcom Bubble in the late 1990s, caused by excessive speculation of Internet-related companies.
The Nasdaq Index was hit particularly hard since technology stocks fell the most. By late 2002, it had fallen by about 75% from its previous high.
During the crash, some of these technology and internet companies failed and shut down but the survivors, such as Amazon.com Inc (NASDAQ: AMZN) and Qualcomm Inc (NASDAQ: QCOM), have gone on to become some of the biggest companies globally.
Global Financial Crisis of 2008-09
The subprime mortgage lending and subsequent packaging of these loans into investable securities were the culprits for the Global Financial Crisis (GFC) during 2008-09.
Investment bank Lehman Brothers had to file for bankruptcy in 2008 and it was the fourth-largest investment bank in the US at that time.
It was obvious that there was a need for massive bailouts to prevent the US banking system from collapsing at that time.
The impact was significant and by March 2009, the S&P 500 Index had lost more than half of its value from its previous high.
COVID-19 Crash in 2020
On February 2020, global stock markets crashed suddenly as the COVID-19 pandemic caused an economic shutdown in most developed countries, including the US.
The stock market plunged into a bear market at the fastest pace ever but it was a short-lived bear market as the global stock market re-entered a bull market by April 2020.
Knowing that bear markets are common incidences does not provide a safety net for investors but here are five rules that investors can follow so that they can take advantage and invest in a bear market.
1) Invest long term
When it comes to investing, it is important to look beyond the current volatile market and geopolitical tensions.
The worst thing to do in a bear market is to change your portfolio strategy entirely.
It is normal to pivot your portfolio into a more conservative approach but investors need to stick to their investment strategy.
One of the easiest ways to lose money in the stock market is to move in and out of your investment positions too quickly.
By reacting emotionally to market swings, you are actually buying on highs and selling on lows.
Instead, invest in stocks that you want to own for the long term and don’t sell them simply because their share prices went down during a bear market.
2) Quality stocks
As mentioned earlier, some of the Big Tech names today were also affected during the Dotcom Bubble in 2000.
It is not a surprise that most of the companies with strong track records were also affected in the current bear market.
Share prices are usually driven by sentiment in the short term, as well as perceptions of investors, but long-term investors need to focus on the quality of the businesses and their management.
Investors need to focus on companies with strong balance sheets to support business growth and durable, competitive advantages.
Investing is not rocket science but investors need to develop a principled investment strategy that is based on a structured research process.
Here are the 10 questions to ask before you buy (Part 1) and Part 2 that will help to guide you to find quality stocks.
3) Use dollar cost averaging
My colleague, Tim, has actually written about whether you should use dollar cost averaging (DCA) when investing (back in 2021) and I think it’s timely to revisit his article.
For me personally, I think investors can stick to DCA as making smaller investments at regular intervals helps to limit our reliance on our emotions – which can lead us to sell at a loss or chase high-flying stocks at astronomical prices.
4) Don’t try to catch the bottom
Trying to time the market is almost impossible and it is important to remember that the goal is not to invest at the bottom.
Instead, it is about finding companies that have qualities that you like and businesses that you want to own for a long time.
This is important because in a bear market, a rebound rally is often seen in the intervals but it is hard to shake off the downside pressure as negative sentiment could persist.
It is quite possible that the share price could go down further after you buy the stock.
5) Build positions
The goal is to build positions in companies that you want to own for the long term. This goes hand-in-hand with what I said earlier about using DCA and avoiding trying to catch the bottom.
Instead of trying to time the bottom and go all-in, like how we watch the Texas Hold’em Poker game, investing is about building positions gradually over time.
Even if the share price is a screaming buy for you, it is a better strategy to gradually invest into the company.
Put your money to work
I think it is normal for us to sweat over our investment portfolio value during a bear market but investors need to look beyond the current geopolitical tensions and turmoil in the stock market.
By having the right perspective about how investing works, you can then put your money to work for you.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
