3 Thoughts During My First Bear Market
/Over the past few weeks, the S&P 500 index has fallen over 30% from its record-highs last month. This is the first “bull”-turned-“bear” market in my career. Here are three thoughts I want to share from my experiences these past few weeks:
Don’t Get Burned
As the overall stock market is declining, various stocks appear to be attractive buying opportunities. Everyone enjoys discounted prices, right? Well, be careful. Jumping into a falling market amid reduced stock prices is similar to touching a stove that was recently turned off. Do it too quickly and you will likely get burned. If you wait patiently, you might avoid getting burned. How does this relate to the stock market? Just because prices are falling, this doesn’t give you the green light to buy new positions. Be patient and don’t try to catch a falling knife.
The Best Offense Can Be Playing Defense
I have never been an advocate for “weathering the storm” and kicking up my feet while riding out market volatility. Be tactical. This may include reducing certain positions, shifting into more conservative investments or temporarily holding cash. Reduce your investment risk, essentially. I’m not suggesting you make wholesale changes, like selling everything. Rather, adjust your portfolio by winding down certain allocations that may be exposed to sluggish areas of the market.
Stay Composed
Avoid knee-jerk reactions. Limit your emotions when considering portfolio changes. Rely on your process (if you have one) and most importantly, tune out financial news or simply news media, in general. Reading headlines and listening to what others say can compel you to make bad decisions, so avoid it. Understand that there is almost 100 years of price data that proves the overall stock market rises in the long-run. Understanding this bigger picture will help you maintain a level head, which is tremendously important.
To be clear, I am speaking mostly to non-401k money — investments outside of your employer-provided plan. By making regular 401k contributions you are, in a sense, managing risk amid an unstable market. How so? These recent contributions are buying into the market at lower prices. This is called dollar-cost averaging, which helps cut down the impact of volatility within the market.
Managing investments during a precipitous fall like we are currently seeing requires a heavy dose of self-control and poise. Hopefully, these thoughts provide value to you in the weeks and months ahead as you navigate the rest of 2020.
I hope you enjoyed reading!
Joshua J. Baird
Investment Adviser Representative