When markets are up and your portfolio is growing, investing can seem so easy. To build wealth over the long term, though, you’ll need to successfully navigate bear markets, or market downturns. Interestingly, success during bear markets comes more from your investment approach and preparation than any actions you might take during a market downturn. Let’s take a closer look at what you should (and shouldn’t) do during these downturns.
Have a Long-term Focus
Focus on the long term. While markets rise and fall, they have always trended upwards over time. Even during the Great Recession, markets rebounded within 1 ½ years. When you invest, there will be times when your portfolio’s value decreases, but the markets have historically increased over the long term, providing you with the opportunity to similarly increase your wealth over that same long-term period.
Match Investments to Your Risk Profile
Are you a high-risk, high-reward investor? If you are, you might invest in emerging markets, start-ups or high-yield bonds. If you prefer a lower-risk approach, you should consider investments like government bonds, especially from stable, developed countries. Whatever your approach is, it’s important to match your investments with your risk tolerance: if you are comfortable with the risks you take, you’ll make better decisions when markets pull back. Your advisor can help you understand and refine your risk profile, and can suggest investment options that fit that profile.
Don’t Panic
During a bear market, it’s not easy to watch your portfolio value shrink. It’s critical, though, not to panic. Selling during a downturn is rarely the best course of action. Instead, have confidence in your financial plan, and stay the course until markets recover.
Buy Low and Sell High
When a company with good fundamentals is underperforming, it’s worth consideration for investing. In fact, fund managers have many “buy low” opportunities during bear markets, when many strong companies tend to be undervalued. Later, when markets recover and investments are overperforming, it’s time to sell them and reinvest. Your financial advisor will help you understand when investments are overpriced or undervalued, and can recommend re-balancing options for your consideration.
A Little Knowledge is a Dangerous Thing
It makes sense to be informed about the investments you are considering, along with factors that could affect market performance. However, there’s a subtle trap in using regular media sources for your investment research: the market generally “prices in” factors that affect investments well before they become media stories. As a result, stocks that seem attractive are often over-valued by the time you hear about them, and negative financial news can tempt you to make emotional and unnecessary selling decisions.