Feeling Your Best in a Bear Market Could Be the Worst Decision About Your Financial Health Smart Changes: Personal Finance

(Daniel Forber)

The lower-than-expected May inflation data was a turning point for investors hoping that inflation would reverse trend and start falling. The consumer price index rose 8.6% in the 12 months ended May 31, what the Bureau of Labor Statistics said was the largest 12-month gain in more than 40 years.

Between June 6 and June 16, the broader index suffered its worst 10-day drop since spring 2020 as Nasdaq Composite down 11.7%, S&P 500 down 11%, Dow Jones Industrial Average fell 9.1%. Many stocks made new 52-week lows on June 16.

It’s hard to think long-term when the stock market continues to make lower lows. When the market turns bad, people say “I should have sold a month ago”. There is no doubt that selling and walking away to stop bleeding can be an emotional release. But it’s usually a bad decision for your financial health. That’s why sticking with volatility — despite the pain — is the best course of action during a bear market.

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Similarities between life and the stock market

The stock market has many similarities with life. It has its ups and downs. It can be driven by greed and fear. There are winners and losers; losers who ignore their chances and major men who are pushed from their thrones.

Like many things in life, doing what feels good in the short term inhibits long-term success and happiness. Selling your investment can be comforting because it ensures investors don’t lose more money. However, the opportunity cost of selling during a sharp decline can be brutal.

Past performance has shown us that buying or at least holding has been a good idea in every bear market in U.S. history. So far, this has been a 100% successful strategy due to the steady growth of the US economy. While it feels good to sell, it could be a catastrophic mistake, causing investors to miss out on years of gains. That’s because it’s hard to buy back the stock market after you sell it.

One reason buybacks can be challenging is because a market bottom isn’t defined until it’s over. The bottom of this bear market may have occurred last week. Or a new bottom could be formed in a few days. Or maybe in a few months, we’ll realize the bottom is over.

During the worst of the COVID-19-induced crash in spring 2020, many said the market could retest its lows. When sentiment turned positive, the market had staged an epic rally. When everyone says the market will continue to fall and few are optimistic, it’s usually a good time to buck the trend and take the other side.

The trap of timing the market

Now, if you sold the stock when the market was about to fall, you need very little humility and grace to accept the mistake and buy it back at a higher price. Therefore, very few people do it. For those who have the courage to repurchase, the pressure will be high. When investors aren’t in the market, or aren’t in the market as much as they’d like, they’re likely looking for ways to re-enter. This is the classic timing of the market: when to get out, when to come back, when to get out, etc.

It’s not the ability to make a good decision that makes timing so difficult for the market — it’s the decision you have to make Some Good decision to make it work.

Every time an investor sells, they are actually bucking the long-term uptrend in the stock market. So it takes another good decision to re-enter, and then a third good decision if they sell. The whole ordeal is time-consuming, nerve-wracking, and ultimately far more complicated and less efficient than simply buying a quality company and holding it for a few years.

A final point is that cleverly timed markets in epic ways – such as selling before a major crash or buying near the bottom – can generate false confidence that can lead to subsequent market timing attempts, which can lead to missed There are more opportunities than gains. For example, many of Michael Lewis’ top stock pickers big short Poor performance since the financial crisis. Once you time the market once, it’s hard not to try to do it again.

Delayed gratification is an investor’s best friend

Avoiding the temptation to sell during a bear market is not easy. What makes the decision easier is to position your portfolio in companies that you think will be successful for decades to come. That way, no matter how bad the sell-off is, you can be confident that the business you put your hard-earned savings into can get through the other side.

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