In the short term, investing can feel like a rollercoaster ride.
There are high highs and low lows, and sometimes, a moment of pure free-fall. But, despite all the twists and turns investors face, investing can generate significant wealth over the long run. That’s because of the unique power of compound interest — or earning interest on your earned interest.
But, to benefit from compounding, investors must stay invested.
And unfortunately, that can be tough, especially during a bear market, as investors watch their portfolios drop month after month. But, the consequences of selling during a bear market can be steep.
So how can investors stay the course? Our certified financial planners in Utah have the tips and tricks for you!
Here Are 3 Key Things Investors Should Remember During a Bear Market:
1. It’s All About Time in the Market
“It’s not timing the market that will earn you the greatest reward. It’s time in the market.” — Rich Duprey
Many investors have heard that it’s not timing the market that will earn you the greatest reward but time in the market.
But why is that? That’s because it’s nearly impossible to get market timing correct, and guessing incorrectly can devastate your portfolio. Consider that to time the market correctly, you’ve got to be right twice.
First, you need to get out of the market near or at the top of a bull run, and second, you need to know the exact time to hop back in, ideally at or near the bottom. In other words: you must know when to sell out and when to buy back.
And unfortunately, while the stock market can be pretty predictable over long enough periods, it’s a guessing game in the short run.
On top of that, guessing wrong can cost investors big. That’s because a tiny number of days account for a substantial percentage of investors’ total gains. According to research from J.P. Morgan, if you missed the top 10 best days in the stock market between 1999 and 2018, your overall returns were cut in half.
Unfortunately, investors have no way of knowing when those 10 best days will occur, and bear markets are often followed by significant market growth, typically called a market rebound. So, the only guaranteed way to ensure investors capture the best days is to stay invested for the long haul.
2. Stocks Are the Best Long-Term Investment There Is
For some investors, there comes a point where the volatility of the stock market is too much.
That’s understandable, as market swings can feel relentless. But, investors need to consider the alternatives. Ideally, investors want to grow their money over the long run, at least keeping pace with inflation, but at best, providing for a healthy and secure retirement while achieving all their financial goals.
And while there are many different asset types to consider, from bonds to real estate to commodities, stock investing has proven itself as the clear winner over long periods.
Reviewing the chart below, you can see that US small and large-cap stocks have vastly outperformed long-term government bonds, treasury bills, and inflation from 1926 to 2019.
Remember that although stocks can be a great long-term investment, it’s critical to design an investment portfolio that reaches your financial goals while staying within your unique risk parameters. In other words, build a portfolio that lets you sleep at night while still achieving your financial goals. For most, this will involve some combination of stocks for growth and bonds to reduce volatility.
3. When in Doubt, Just Zoom Out
If you zoom in on the stock market any given day, week, month, or even year, you can be down big.
But the more you zoom out, the higher your odds of a positive real return. In other words, the longer you stay invested, the less likely you are to lose money.
Consider the following time frames and the probability of generating a positive or negative return:
The probability of positive returns increases the longer you stay invested.
|Probability of Positive Return
|Probability of Negative Return
As you can see, over any given day, your odds of a positive return are reduced to a coin toss. But, zoom out to a year, and you’ve got a 72.8% chance of positive returns, and over 10 years, a staggering 94.2% chance of generating a positive return.
So remember: when in doubt, just zoom out.
TrueNorth Wealth Is Here to Help
If you’re interested in working with a fiduciary CFP® professional to help outline your unique investment plan, complete with a custom investment portfolio to deliver your financial goals, then TrueNorth Wealth is just one phone call away.
Although times may seem tough right now, our team includes the best financial advisors in Utah and Boise, ID, and we’ll help you weather the storm. Schedule a free consultation today!