Should My Investing Strategy Change During A Bear Market

With stocks dropping further each day, even the savviest investors are wringing their hands over their investing strategies. And who can blame them? During a bear market, anxiety can quickly pressure you to reconsider your investments and your long-term goals.

What’s the right move? As it turns out, there are a number of proven ways to navigate a rough financial landscape without letting panic dictate your decisions.

The Financial Landscape

Investors are currently facing a crisis on two fronts:

1. Stocks are Down in 2022

First, investors are facing a “bear market,” meaning the overall trend is for stock prices to fall across the board. The benchmark S&P 500 — a common equity index that is often viewed as a measure of the overall health of the stock market — fell by roughly 20% between January and May of 2022.

The Nasdaq, the second-largest stock exchange in the world, has likewise dropped 30% since its high point in November. This downward trend has continued through June , causing investors to wonder about their future.

Nick Tell, CEO of asset management firm Armory Group, believes that this trend is likely to continue, saying, “We believe that companies will continue to experience margin pressure and therefore continue to disappoint with respect to earnings, so long as the producer price index continues to exceed the consumer price index.”

However, he adds, there may be cause for optimism: “When the PPI converges more closely to the CPI, we believe that will confirm that the supply-side shocks of 2021 and 2022 are finally abating. That should lead the way for improvements in the equity markets.”

2. Interest Rates are Rising

At the same time, investors are facing rising interest rates.

Industry experts believe this trend will continue. Nick Tell says, “We believe that the U.S. Fed will need to significantly increase rates in 2022 from current expectations in order to position the economy for growth in 2023.”

Unfortunately, Tell adds that “if the Fed continues a more incremental approach, we believe that a recession is likely by the first quarter of 2023 and expect that the recovery will be postponed until 2024.”

Developing the Right Investing Strategy

With these challenges in mind, what strategies should investors know in order to best navigate the current market?

Know Your Investments

Now might be a good time to review your investments. After all, if you choose to refine your strategy, you’ll first need a clear picture of your current position. Are you currently invested in stocks? Bonds? What industries are represented by your portfolio?

These questions will help you assess the diversity of your portfolio, as well as evaluate any investment vehicles or industries that tend to be hit hard by inflation or other economic trends.

Maintain a Long-Term Mindset

Before you give in to panic, you need to know that the market has always been volatile, to one degree or another. As Yale economics professor Robert Shiller wisely puts it, “There are better decades than others.”

As much as investors dream of overnight success, the path to wealth is often a marathon, not a sprint.

Investors shouldn’t jettison their long-term strategy based on a temporary economic downturn. Instead, focusing on your long-term goals can mitigate the risks of a volatile market and help you build wealth over the course of many years.

Take Reasonable Risks

Investing in the stock market always carries some degree of risk. Therefore, it’s important for investors to assess their risk tolerance level and avoid taking excessive chances.

This doesn’t mean that you should avoid investing in that startup company that caught your eye, but you should be careful and invest a responsible amount of money. A good rule of thumb is to avoid investing money that you may need in the next one to two years.

Maintain an Emergency Fund

In addition to your investment accounts, you should also keep a cash emergency fund that covers six to twelve months of your expenses. Unfortunately, fewer than 50% of Americans have enough savings to cover even six months of expenses, and inflation is only making it harder to stretch every dollar.

Build your emergency fund, and don’t compromise these savings to make an impulse investment.

Take Advantage of Buy-and-Hold Stocks

If there’s a silver lining to a bear market, it’s that investors might be able to snag major stocks for a discount. Companies like Disney and Costco have taken a beating due to the pandemic and supply chain issues, which may allow investors to snag some large-cap stocks at historically low prices.

Consider Index Funds

Instead of trying to beat the market, index funds such as the S&P 500 simply track a common market index. Recent data has shown that 90% of active fund managers fail to meet their benchmark index. So trying to actively select stocks may not be nearly as effective as an index fund that simply tries to match the index’s performance.

Stay the Course

Should your investment strategy change during a bear market? Not necessarily. The best investments come from long-term goals, not overnight growth. Stay the course, and make decisions based on your investment goals, not the current performance of the market.

By Jaime Catmull, Contributor