June 13, 2022 S&P 500 — one of the most popular indexes that tracks the top 500 U.S. public companies — entered a bear market, down more than 20% from its early January 2022 highs. There are no foolproof plans that can save you during a bear market, but there are some things smart investors do to weather the storm. Here are three of them.
1. Don’t panic
When the stock market enters a bear market, the first thing investors need to remember is that a bear market has proven to be an inevitable occurrence in the stock market. They have happened in the past, and assuming they continue to happen in the future, this is one of the safest bets you can make. The only thing you should not do in a bear market is panic. Panic can be especially counterproductive if it forces you to sell your stock just because prices are falling.
The goal should always be to buy low and sell high, not the other way around. If you are still far from retirement, you have time to let the market recover. Not every stock that falls in price ends up rising again, but history has shown us that major indices such as the S&P 500, Dow Jonesas well as NASDAQ Composite — and the market as a whole tends to bounce back sooner or later.
2. Focus on diversification
“Don’t put all your eggs in one basket” is a saying that applies to many areas of life, and investing is no exception. Diversification is one of the main pillars of investment, and any solid portfolio should consist of a fair mix of assets. You never want to be in a situation where the success or failure of your portfolio depends too much on too few stocks. Diversification is key to reducing some of the risks that come with a bear market.
If your portfolio is well diversified, you may not experience the boom that can happen to individual companies, but you’re also not completely exposed to the sudden drops that can happen. For example, have a good piece of your portfolio in Netflix (NFLKS 1.25%)may have been profitable when it went from just over $150/share in June 2017 to over $690/share in October 2021.
3. Use dollar cost averaging
When dealing with money under normal circumstances it can be difficult not to let your emotions get involved, but this is especially true during a bear market when it looks like you are losing money. To help with this, investors can start dollar value averaging, which involves investing regularly at a certain time, regardless of how the stock performs at that time.
Dollar cost averaging not only provides consistency as you invest at regular intervals rather than being stalled by falling prices, but it also helps lower the underlying cost during a bear market. Your cost base is the average price you paid for a particular share, as you have likely bought different shares at different prices over time. The lower your underlying value, the higher your profit when you end up selling the shares.
The goal is to avoid the situation where you are trying to time the market; dollar cost averaging helps here. If you think prices will continue to fall, you will have a hard time convincing yourself to buy at today’s price if it falls soon. But you never know how long trends last; The best thing you can do as an investor is to stay consistent and trust that you are investing in great companies and funds that will deliver great long-term returns.