You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.–Peter Lynch
If you read any news sites, chances are you have seen at least one article with a screaming headline about the poor state of the stock market. As I write this article the stock market has now entered into what is called a bear market. Some of you may ask the obvious question, “What is a bear market?” Simply defined a bear market is when the value of the stock market has dropped by 20% from its recent high. Is this something to worry about or is it just a normal part of the stock market cycle that saavy investors can use to their advantage? On average a bear market happens every 3-4 years. This indicates that bear markets are regular occurrences and that they should be expected throughout the course of one’s investing timeline. Most of us start our careers with an approximate investing lifetime of 60 years (30 years working and then 30 years in retirement). This means that we will likely experience 20 bear markets. That means that you can expect your investments to drop at points in your investment careers. For many of us who have only started investing recently, this is a foreign concept. We just ended one of the longest bull markets in the stock market’s history (what is a bull market?–it is a stock market that goes up without a bear market). Many of us have not experienced a bear market, meaning that our investments have lost money for a period of time. Does this mean we should panic and sell? NO! When you buy investments (mutual funds, stocks, bonds, etc…) especially in retirement accounts you are buying things that you should expect to keep for at least 30 years. This means that you are buying something that you expect to fluctuate in value but after 30 years history would say that the value will be much more than when you first purchased it. This concept if one of the best defenses against a bear market. If you think long term, the day to day changes in the value of a retirement account don’t matter much, it is the end value that matters.
A second concept that helps people weather bear markets is the concept that when you purchase an investment you are buying a share (hopefully in mutual funds or exchange traded funds to help diversify you against the risk of buying the stock of a single company). When you focus on the shares you bought the value on any given day doesn’t matter, you still own X shares of a mutual fund. This enables you to think of losses and gains as only on paper, meaning that unless you sell the share you haven’t lost any money in a bear market, and likewise you haven’t gained any money in a bull market. In the industry these gains and losses are called “paper gains or paper losses.” Thinking in terms of shares also helps people in bear markets continue to invest, which is a key component of a successful investment lifetime. In bear markets the paper value of shares is going down and this means that you can buy more shares for any given amount of money. This makes your regular retirement contributions (those 401k, 403b, 457b, etc…deductions from you paycheck you make each pay period right??!) buy more shares. Ultimately having more shares will allow you to have larger gains when the inevitable bull market happens and stock prices start rising again.
A bear market is the time to be pouring money into the market, buying low, rather than taking it out.–James Dahle, author of The White Coat Investor
Dr. Dahle makes the point that a bear market is the time to really put money into the stock market through mutual funds or exchange traded funds. This is what sets the foundation for future growth in your retirement portfolio. He even says to defer large purchases like a new car, house, or other consumable items in order to put this money into the stock market. This is not a guarantee that your money invested will increase immediately. Some bear markets can last for years, but this gives you the opportunity to really increase the number of shares you own and thus, really have your earnings take off when the bear market ends and a bull market starts!
Admittedly, it is hard to watch your retirement savings “decrease” during a bear market as the price of the shares you own decreases. This is why many financial experts do not encourage you to look at portfolio balances frequently at all. Not looking allows you to tune out the hyped hysteria that the financial and other media parlay in their headlines and allows you to keep the course of your investment plan and will allow you to reach your financial goals!
I will end with one of my favorite quotes of John Bogle, the founder of the mutual fund company, Vanguard:
The mistakes we make as investors is when the market’s going up, we think it’s going to go up forever. When the market goes down, we think it’s going to go down forever. Neither of those things actually happen. Doesn’t do anything forever. It’s by the moment.—John Bogle
None of the above should be construed as offering tax, investment, financial planning, legal or any other advice. Please consult with professionals in these fields before acting on anthing discussed in these articles.
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