When you’re in a bull market, month after month or day after day (depending on how often you check), it can be easy to forget that all good things must come to an end. At some point, you will have to face a bear market…
During this time, you’re tasked with staying calm while watching your balances dwindle. This can be tough, but keeping these four things in mind will help.
1. You can buy at lower prices
You hear that you should buy your investments low and sell them high, but actually accomplishing this is not so simple. That’s why bear markets are a great opportunity for you to scoop up that stock or ETF you’ve been eyeing at a discounted price.
There’s always the possibility that you don’t time the bottom perfectly, and you end up buying a security that declines further in price, resulting in a loss. You can limit fears of this happening by dollar-cost averaging. When you do this, you set aside a pre-determined sum of money that you will invest every month or quarter. Some trades, you’ll buy higher prices, and others, you’ll buy at lower prices, but most importantly, you’ll be investing your money instead of missing out.
2. You get a better understanding of your risk tolerances
Watching your investments soar in value is fun, but those feelings of elation will take a turn for the worse when you start losing money. Now, with your livelihood seemingly at stake, you may even have an overwhelming desire to let fear take over and to sell everything, waiting to invest again only when the markets stabilize.
If this sounds familiar, you might be invested too aggressively. The riskier an investment is, the more it should rise during a bull market, but the harder it could fall during a bear market. That is why a downturn in the stock market will give you an excellent idea of your risk tolerance. After your nerves have been tested and you’ve figured out how much you can stomach, you can make adjustments to your investing strategy and holdings accordingly. Doing this will help you feel less nervous about market volatility going forward.
3. You learn to control your emotions
If you’ve survived a bear market before, you know from firsthand experience that your accounts eventually rebounded. How long the recovery takes depends on the length of the bear market and the severity of the decline, but there has never been a time in history when the markets didn’t recover. During two recent market crashes, the tech crash of the early 2000s and the Great Recession of 2008, investors who were 100% invested in large-cap stocks recouped their losses within four years of the bear market ending.
Knowing that the markets have historically always come back, you can…
Continue reading at THE MOTLEY FOOL