When the market falls sharply in the first part of 2022, investing is incredibly scary. Every time you make a deposit it feels like you’re throwing good money after bad, only to see a large chunk of it evaporate before your eyes.
And as you watch your account balances dwindle, your future goals also seem to be slipping before your eyes. Yes, when you look at your investments against a bear market, it can be ugly. Still, there is a reasonable strategy you can use to come out on top.
First: Get your financial house in order
Bear markets often bring job losses. Even if you keep your job, life happens and unexpected expenses can pop up at times when your stocks are low. As a result, it’s important to have an emergency cash fund in an FDIC-insured account. No, you won’t make a huge return on that money, but you’ll likely have cash on hand if you need it. That dramatically reduces your risk of being forced to sell your stocks when they are down in a bear market.
In addition to an emergency fund, it’s important to keep your debts under control. Investing can be okay when you have a loan, but that loan really needs to have three key characteristics:
- It should have low interest rate. It makes no sense to borrow money at a higher rate than you can reasonably expect to earn on your investments over time. Even if it’s close, paying off your debt has a guaranteed rate, but stock market returns are never guaranteed.
- It should have a payment that you can afford without ruining your lifestyle. It’s tough enough to invest in a healthy market, but when the bear roars, the huge payout pressure makes it even harder to make smart decisions.
- It should play an important role in your future. If your loan is critically important to you — a place to live, an opportunity to earn a living, or something you need to sustain your life — the benefits may be worth the risk. loan
Next: Identify stocks for what they really are
When all is said and done, a share of stock is nothing more than a fractional ownership stake in a company. That stock gets its value based on the company’s performance and prospects over time.
During a bear market its share price falls, ask yourself why it is falling. It could be because the company’s prospects are bleak or the market is simply fearful. If the company’s prospects still look strong but its stock price is weak, you may have a legitimate bargain on your hands. Using a valuation technique like the discounted cash flow model to find those bargains can help you deliver better.
In that case, a bear market is a good time to pick up more shares of a good business at an inexpensive price. A shift in perspective to focus on trading instead of stocks can go a long way toward calming your nerves and helping you make smarter long-term decisions.
Finally: Realize that no one gets it right every time
While investing is a great way to build wealth over time, no investor gets it perfect, not even Warren Buffett. You make mistakes. Plus, even if your process is good, sometimes companies’ fortunes suddenly turn sour.
Consequently, it is important to have a diversified approach to your investments. Diversification does not prevent bad things from happening to your portfolio. What it can do is minimize the impact that a single company stumble has on your overall portfolio. This is an important part of giving you the best chance to stay invested in a bear market and emerge in a better position on the other side of the bear market.
Mix that with long-term focus to beat the bear
When you combine a solid personal finance foundation with a value-based investing approach and a healthy respect for diversity, you have a powerful toolkit for beating bear markets. Remember that the market takes time to come to its senses, so be patient as your stocks do their thing.
In the long run, a company’s market price should respond to its fundamental business strength, not just market sentiment. With the patience to let that process play out, you can finally put that bear market behind you.
By making today the day you put these pieces together, you set yourself up with a better toolkit to ride out the bear market. The sooner you start, the sooner you can start fighting back. So, start harnessing the power of your inner bear fighter now.
Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.