Podcast Summary
Understanding Bear Markets: A Normal but Painful Part of the Investment Cycle: Bear markets, characterized by declines of 20% or more in the S&P 500, are a normal but painful part of the investment cycle. They last around 13 months on average and result in a 30% loss, but durations and severity can vary.
Bear markets are a normal part of the investment cycle, but they can be painful experiences for investors. A bear market is defined as a decline of at least 20% in the S&P 500 index from its previous peak. Bear markets are less common and last for a shorter period of time compared to bull markets, which are characterized by rising asset prices. The average bear market lasts around 13 months with an average cumulative loss of 30%, while the average bull market lasts for over 60 months and results in an average gain of nearly 180%. However, it's important to note that the duration and severity of bear markets can vary greatly. For instance, the bear market during the COVID-19 pandemic lasted only 33 days, while the dotcom bubble bear market lasted for nearly 3 years. As inexperienced investors, we've already experienced a bear market during the COVID-19 crash, but it's essential to understand that stocks don't only go up. The most recent bull market started in 2009 and lasted for over 11 years, while the bull market that followed the COVID-19 bear market lasted for 2 years. If you've started investing in the last 11 years, especially in the last 2 years, you might not be used to bear markets or major declines in the stock market. So, while it may be disheartening to see your investments decline during a bear market, it's crucial to remember that they are a natural part of the investment cycle and that markets eventually recover.
Bear markets offer opportunities to buy stocks at discounted prices: Prepare for bear markets, view them as chances to buy high-quality stocks at discounted prices for potential long-term gains
Bear markets are an inevitable and even essential part of investing in the stock market, despite being less frequent and shorter-lived than bull markets. Although they may cause temporary pain and discomfort, they offer opportunities to buy stocks at lower prices, which can lead to greater potential returns in the long term. As investors, we should be prepared for bear markets and even view them as a chance to add high-quality stocks to our portfolios at discounted prices. Remember, if your investment horizon is long-term, buying stocks during a bear market can set you up for potential gains when the market eventually recovers.
Our perception of risk in the stock market can be distorted by emotions: Market volatility is normal, emotions can distort risk perception, long-term perspective and understanding companies/market are key.
Our perception of risk in the stock market can be distorted based on the emotional reactions to market fluctuations. As stock prices go up, we may feel less risk, but as they go down, we may feel more risk even if the underlying fundamentals of the companies have not changed significantly. This emotional response is due in part to the pain of loss being greater than the pleasure of gain, as confirmed by research in prospect theory. Therefore, it's important to remember that market volatility is a normal part of investing and to maintain a long-term perspective. Additionally, having a solid understanding of the companies in your portfolio and the overall market can help mitigate the emotional response to market fluctuations.
Bear markets and economic downturns: Bear markets can lead to significant gains for long-term investors, but they often coincide with economic downturns. Understand your risk tolerance and prepare for potential economic challenges.
Bear markets, while challenging, can provide valuable opportunities for long-term investors. If you had invested during the previous bear market in 2009, and continued to invest throughout the bull market that followed, you would have made significant gains. However, it's important to note that bear markets often coincide with economic downturns, such as recessions. According to investment research firm CFRA, nine of the twelve bear markets since 1948 have been accompanied by recessions. Central banks raising interest rates and reducing bond purchases can also contribute to a recession by discouraging investments and slowing down the economy. To prepare for potential economic downturns, it's crucial to understand your risk tolerance and ensure that you can still sleep well at night despite taking investment risks. While it's natural to feel anxious during market volatility, it's important to avoid extreme measures like hiding under the covers and eating large amounts of chocolate. Instead, focus on making informed investment decisions and staying financially prepared for potential economic challenges.
Understanding your risk tolerance and mental health in investing: Find a strategy that suits your risk tolerance and mental health, handle market swings, maintain emergency funds, and tailor your investment approach accordingly.
Investing comes with risks, especially when putting money into high growth, potentially volatile companies. However, it's essential to find a strategy that suits your risk tolerance and mental health. This year's market volatility serves as a valuable test for new investors, helping them understand their investment style and ability to handle market swings. It's also crucial to have sufficient cash on hand for emergencies, ensuring financial security and freedom. Remember, everyone's situation is unique, so tailor your investment approach accordingly. Additionally, the first hundred trading days of 2022 have been particularly challenging for the S&P 500 and Dow Jones, but not all years are as unpredictable.
Prepare for economic downturns with an emergency fund: Having an emergency fund is crucial during bear markets and recessions to avoid selling investments at a loss or using them for living expenses. Most financial advisors recommend leaving investments for 5+ years, but prepare for market fluctuations with a long-term perspective.
Having an emergency fund is crucial during bear markets and recessions. These economic downturns can force you to sell your investments at a loss or even use them to cover living expenses. The average annual return of the S&P 500 is 10%, but credit card debt can have interest rates as high as 20%. Taking on debt to pay for emergencies can perpetuate a cycle of debt instead of allowing investments to grow over time. Additionally, most financial advisors recommend leaving your money invested for at least 5 years, but preferably much longer, as the stock market has historically bounced back from significant declines. However, prepare for market fluctuations and declines, which are a natural part of investing. A study by Schroders shows that if you had invested in the S&P 500 for only 1 year, you would have lost money roughly 30% of the time. But if you increased that period to 10 years, your chances of making money would be 90%. Expand that to 20 years, and you would have made money 99.99% of the time. So, think long term and be prepared for market fluctuations, but also have an emergency fund to avoid being forced to sell investments during economic downturns.
Viewing market volatility as a fee instead of a fine: Adopting a mindset that market volatility is a necessary cost for potentially greater returns can help investors stay invested during market fluctuations.
The way we perceive the costs of investing can significantly impact our willingness to stay invested during market volatility. The speaker argues that viewing market volatility as a fee rather than a fine can help investors develop the mindset needed to stick with their investments long enough to see gains. This perspective shift can make the costs of investing seem worthwhile, similar to the cost of a ticket to Disneyland, which provides an enjoyable experience in return. The speaker emphasizes that market returns always come with a price, and investors have the freedom to choose whether to pay it or not. By reframing market volatility as an admission fee, investors may be more likely to embrace the ups and downs of the market and stay invested for the long term. As investor David Gardner puts it, "The market goes down faster than it goes up, but it goes up more than it goes down over the long term." So, the key takeaway is to adopt a mindset that views market volatility as a necessary cost for potentially greater returns, rather than a punishment or fine.
