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Take a deep breath … relax … exhale … repeat. Yes, there is a bear market. It’s now official, with the S&P 500 Index down more than 20%. But we’ll get you through this with some daily affirmations since it’s been shown that a positive attitude leads to a positive outcome. Here are five bear market affirmations to get you through this rough time in the market.
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THE MARKET IS NOT GOING TO ZERO
Investors tend to extrapolate when the market goes down two percent, three percent or more — every single day — and get themselves into a lather about how much they are going to lose if it keeps dropping. This fear, of course, gets worse if you borrowed money to invest.
Sure, in a deep recession we might see some companies go bankrupt (though, on average, companies are in good shape versus past cycles). But the market is not going to zero. It just feels like it. You need to fight your instincts here. The market right now is like touching a hot stove: you want to pull away to avoid the pain. But even if you get burned, you are still going to use that stove the next time you cook dinner. Stocks are painful today, but may not be tomorrow.
THE NEWS ALWAYS LOOKS BAD WHEN IT IS BAD
Take your pick of bad news: war, interest rates, cryptocurrencies, inflation, Taiwan, supply chains, COVID-19, rising wages and/or profit margins. As a result, you see negative viewpoints everywhere, and this helps reinforce your own negative views. Once these negative thoughts enter your head, you start looking for more, which sets up both a confirmation bias and a recency bias. In other words, you expect the bad news to continue.
Keep in mind, though, that the best time to buy is usually when there is no reason to buy: meaning, all the selling is already done. As they say, no one rings a bell at the bottom. I can’t tell you when the bottom of the market will be, but I can guarantee that all the news you hear at the bottom is going to be bad.
DOOMSAYERS DON’T KNOW MORE THAN YOU
In a bear market, the doomers come out to tell investors that everything is going to get worse. This week, we saw a so-called analyst on television predict that the Nasdaq market is going to drop 80%. These gloomy predictions get a lot of attention, sell newsletters and training courses, and are far more interesting to the media than a forecast that says the market might go up a bit. And, of course, these doomsayers reinforce the confirmation bias mentioned above.
But to help you get through the bear market, remember that these prophets of gloom do not have psychic abilities. They do not have any better predictive ability than you, or I. In other words, we all have none. Keep simple economics in mind here. If someone could actually predict the market, then simply telling others about their prediction would only impair their own ability to make money from their prediction (since everyone would do the same thing and the prediction would be fully discounted in the market). Daily, remind yourself that no one — no one — can predict the market.
YES, LOOK AT YOUR PORTFOLIO
A lot of recent commentary posits that you should simply not look at your portfolio during a bear market. The theory here is that what you don’t know can’t cause you pain. Um … no. As painful as it may be to look at your portfolio, ignoring it is not going to help you. Even simply reviewing your holdings to ensure you are comfortable with them can be beneficial.
We are not fans of averaging down, but when everything is down, there can be some good buying opportunities. Looking at the dividends coming into your portfolio can remind you that you own businesses, and businesses continue despite all the gloomy headlines. Ignoring your own portfolio won’t help you much. The markets don’t care if you have lost money.
MARKETS PRICE THINGS IN AHEAD OF TIME
One of the best mantras is to remind yourself that the market always looks forward. Thus, expectations have a way of getting fully priced into valuations (and more). Today, everyone expects a recession. Everyone expects hyperinflation. Everyone expects higher interest rates.
It is possible to set up a ‘heads you win, tails you break even’ scenario. If all the bad news actually transpires, investors shouldn’t care much because the market has already priced in all the bad news. But if any of the bad news turns out to be less bad, or, heaven forbid, good, then the markets can go on a serious rally, because no one was expecting anything good.
Peter Hodson, 5i Research