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.
If you are a DIY investor, sign up for a free account at Personal Capital to help manage your investments. I log in almost every day to check on my accounts and cash flow. It’s a great site for DIY 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.
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36 thoughts on “Bear Markets Will Make You Rich”
Great content joe. It’s called the stock market for a reason, and that’s because fluctuations are a norm. It’s unwise to buy when prices are at sky level. In fact, the best time to buy stocks or assets in any financial market is the it seems like the market is going to close up from dipping beyond expectations. I’ve been a crypto futures trader for more than half of my reading years, and what I’ve learned so far is… you make the most money trading the bear markets.
Great post and timely!
Like Warren Buffet says – Be greedy when others are fearful.
Opportunity knocks once in a while, and no one lost by staying the course! Curious is anyone in our community has read Money Magic, where the author says investing in stocks is risky business, and to invest in more in I bonds in such. I wonder what the rest of the year will have in store for us.
I made my money by being a contrarian. I think the first mistake here is to even believe in the concept of a “bull” and “bear” market. If you don’t use the stock market at all, and hence are not exposed to it, for FIRE you can avoid this entire risk pool. I wrote about this in detail here, if anyone is interested.
Companies may be categorized as shareholder friendly, customer (of their goods & services) friendly & employee friendly. If one can find companies which satisfy all of these three can be a great wealth creator.
The stock valuation is a very misleading parameter. I am in constant search (for 5 years) for decoding the meaning of intrinsic value of a stock which Warren Buffet never explained but is always talked about to be understood. I am also trying to understand it in different perspectives.
A stock is not overvalued if you buy it (at whatsoever price) but never repent on your decision for buying it even if you feel it was costly. A stock is not undervalued if you buy it at a cheap price (your definition of price) but always think why you did buy it however cheap (in your opinion again) it was.
It is like getting a child married with someone with whom your kids and you as a parent yourself remain comfortable the whole life even if the cost of managing the marriage was high. This can not be said overvaluation. But if you need to carry the worries of your kids for the whole life, this can not be said to be undervalued, even though the cost of managing the marriage was low.
This is intrinsic value of a stock, which you can sense (based on facts & others….i do not know what), at the time of buying it like at the time of deciding the marriage. All other valuation metrics are not trustworthy.
And I bet…………………..Warren Buffet must be having that quality of judging. And that is why he is Warren Buffet and everyone else is not.
I do not claim to be an expert. I am simply a starter (5 years).
Solid advice Joe! Looking back at 2008, I really should have been pouring it on instead of getting freaked out. Sadly, the lessons from the DotCom Bomb didn’t fully register. Now with two under my belt, I better get with the program when the next bear market hits. Fool me once… Not sure what the phrase is for fool me thrice. Thanks for the reminder!
Personally, I’m hoping for a brief correction this time. A prolonged bear market like in 2000/2001 & 2008/2009 mostly benefits the already wealthy to very upper middle class since the market is typically a leading indicator. Many common folks get laid off during such times. Even though I can weather through it just fine, for the mid to lower middle class folks, many of them may never recover. It’s not in the countries best interest in my view to continue to increase the economic gap between the haves and have nots.
I don’t get queasy when they drop the price of gas or groceries drop…so why with the market? I like when things go on sale. Yes, my current investments go down and I’m down ten’s of thousands the last few weeks, but I’m not retiring tomorrow and compared to 6 years ago I’m way, way up. There are always corrections/drops/inflation/recession every so often and guess what it always goes back up. Deciding 6 years ago to max everything out and invest like crazy has changed our financial lives forever!
That’s the way to look at it. It’s tough to keep your head when everyone is panicking, though. The best way is to ignore the media.
I’d rather have the market and especially certain sectors go straight to the moon and then flame out like it did during the dotcom boom. The recovery from 2008 crash was nice, but it pales in comparison to the opportunities to find 10 to 30 bagger returns that many investors made during the dotcom boom. This way, even a single $50k investment can set someone up for life. However, I seriously doubt it’ll happen again in my lifetime due to the way startups raise financing these days, but the dotcom boom was fun for those who lived through it.
Well, I think most people couldn’t take advantage of the opportunities. If you’re a good investor, then it’s great for you. I did pretty well on the way up, but lost a bunch on the way down too. I don’t know when to sell.
My rule of thumb after living through the last dotcom bust is that if I’m up over 10 to 15 fold, then I keep sell limit orders at 10% below current value. Just like you, I’m older now and have more capital compared to back then, so those types of returns which were fairly common during the dotcom boom will provide much more substantial gain. If I ever get to $4mil networth, I’ll checkout forever and be happy with a savings account returns.
You’ve said it best – invest more if/when you can during drops in the market. I just posted about this and added allocations to three stocks I own, just yesterday with AT&T, McDonalds and GlaxoSmithKline – buying stocks on dips = More dividend income, more value and decreases your average cost per share. Need to ride the wave downward and (1) keep investing, as you’ve said, as well as (2) invest more if you can.
My plans are to just continually invest as I accumulate cash. I also take heavy positions on a small number of companies. My main frustration with these dips is that I don’t have enough cash to throw at all these stocks! It’s also very difficult to maintain a disciplined approach to investing: Confession time: I dipped into my “rainy day fund” to invest recently…. I revisited what I did and will need to further define my approach to building my rainy day fund so I won’t do that again.
I don’t like to dip into the rainy day fund to invest. A bear market can last 2,3, or who knows many years. I guess if you really know you won’t need your emergency fund, then it might be okay.
Bring on the bear market. I’m living these dips and really only wish I had more money to throw in there. With the market at all time highs, it’s finally nice to see some stocks getting ‘cheap’ so we, as long term investors, can buy and buy!
Loving I meant!
Although I retired a few years ago at the more traditional age of 65, I would offer the following method to anyone nearing retirement, to prepare for the eventual bear market — the Bucket Plan — which people either love or hate. My IRA, which provides a monthly distribution to augment pensions and Social Security, is divided into three “buckets”: A Growth bucket, consisting mostly of stock funds; A Safety bucket, mostly bond funds; and an Income bucket, which is a money market fund and short-term bond fund that provides the monthly distribution. The first two buckets are pretty evenly divided at 43% each. The Income bucket contains about 16 percent of the total, which is enough to provide our current monthly distribution for at least five years. So, in a bear market, particularly an extended one, we don’t have to draw down our stock funds to provide monthly income. When the market does well, as it has in recent years, we take quarterly or annual profits from the stock-heavy bucket and move them into the safety/bond bucket and replenish the Income Bucket. We are always moving the profits forward and always trying to maintain the 43/43/16 allocation. There are lots of ways to set up a Bucket system. This is the one that works for us. The worst thing that can happen to a new retiree — especially one in their 40s — is to have the misfortune of retiring in a bear market and being forced to liquidate stocks and stock mutual funds that have been seriously devalued.
I like the bucket system. It protects against the usual bear market after you retire. Having enough cash on hand is great. 16% is a pretty nice number too. I’ll probably do something like this when we hit 65.
Bear market allows you to buy stocks at a cheaper price. It’s great when you’re in the accumulation phase. Not so good when you’re 70+ and in your full retirement phase.
Well, hopefully when you’re 75, you’ll have much less stock in your portfolio. Right?
That’s very true. By 75 you probably should not have as much equities invested as when you’re in your 30s.
When the stock market crashed in 2008, I was too busy putting out fires at work to even pay attention to my mutual fund portfolio. So I basically did not do anything (i.e. I didn’t sell) and continued to invest the maximum allowed in my 401K. I think that was a good thing. Now that I have the time to monitor the market, I must admit that it is a bit unnerving to experience the wild swings of the market. Through Joe’s insight on investing in dividend stocks, I am trying to buy more dividend stocks and am actually looking forward to buying them when they get cheap.
That’s a great story! Now you know doing nothing is better than stressing out about the market. 🙂
Now that our politicians have demonstrated that they’re happy to backstop Wall Street’s shenanigans with middle class taxpayer money, and the Federal Reserve is happy to print money as necessary to pump up asset prices, I tend to agree with you! 🙂
Ha ha ha, you’re right. It will take a zombie apocalypse to take down the market.
I can’t wait for stocks to go cheap again. I’m still investing though – dollar cost averaging. I wish we had had more money during the recession, but we were broke college students!!!
I’m sure you’ll be able to take advantage of the next one. It’s great that you’re investing at such a young age.
I remember when my husband and I first started investing, we would freak out over the smallest dips. “Oh, no! Our portfolio went down $500 today!” It took us a while to get used to the ups and downs of the market and become comfortable with our long-term investments.
Now, when the US markets are going crazy, we’re sleeping well (we live in Japan). My husband will just casually mention at breakfast, “Portfolio went down $5000 last night,” and we shrug it off. We’re waiting for the opportunity to buy stocks on the cheap again.
That’s experience! Buying on the cheap is the way to go.
Great article! Yes; I agree. Buy buy buy. Also, sit tight; it’s not the end of the world that it dips. You’re supposed to have a little stash anyways (quickly available, your rainy day fund, etc) in case all hell breaks loose, so you never really lose ‘everything’. Not a big deal at all. I LOVE reading the comments of the articles when everything is in the red, though. They make me laugh because investors have such a great sense of humour (especially long term ones) on the market.
I think you need to go through a few of these bear markets before you can convince yourself that it will be okay. The first one is always the toughest, right? Now I’m quite happy to see a bear market.
My advice for a bear market it BUY BUY BUY. I bought like crazy during the 2008-2009 recession and have doubled or tripled my money on those purchases.
Remember that if you’re investing for the long term, it doesn’t matter if you pick the exact bottom of the market. When the market starts to recover, it comes quick and sharp (check out a chart of March to June 2009 for a great example of what happens if you miss the bottom).
Exactly. I’m ready for the next bear market. That’s when I’ll make some money for the long run.
I personally don’t have any tips for dealing with bear markets. I have seven quotations (five serious and two not-so serious) relating to investing, however, that I would like to share. These come from my book “The 777 Best Things Ever Said about Money”.
“I buy when other people are selling.”
— J. Paul Getty
“The key to everything is patience. You get the chicken by hatching the egg — not by smashing it.”
— Arnold Glasgow
“Don’t gamble. Take all your savings and buy some good stock and hold it ‘til it goes up, then sell it. If it don’t go up, don’t buy it.”
— Will Rogers
“My family wasn’t affected by the [stock market] crash of ‘29. They went broke in ‘28.”
— Gerald Barzan
“Nobody ever lost money taking a profit.”
— Bernard Baruch
“The only reason to invest in the market is because you think you know something others don’t.”
— R. Foster Winans
“Stay in love with a security until the security gets overvalued, then let somebody else fall in love with it.”
— Roy Neuberger