What is a bear market? Is it really bad?
A bear market is a period of time where stocks fall significantly. This usually happens during recessions or economic downturns. The term was coined after the stock market crash of 1929. Technically what I am about to discuss refers to becoming a millionaire in the bull run after the bear market however the speed in which wealth is transferred is unlike any other time periods.
When we are in a financial crisis and valuations come plummeting down, there tends to be a common reaction amongst stocks good and bad. They all go down. Of course a majority of people are terrified at this time as they assume it is the end of the world so they sell out of everything.
This escalated fear can result in many assets being sold off way below where they should realistically be at. This is what drives the potential for the most millionaires to be made of the tail end of a recession or bear market.
What I discuss in this article doesn't just apply to the stock market but often many types of financial markets such as the housing market. Of course, each market has it's own quirks and relevant research which will be required to invest confidently. Any market where a market correction occurs can utilise the strategy discussed in this post
How to Win in a Bear Market
What is the fundamental truth of a bear market? It is that asset prices go down. And the truth about the bull market that proceeds is that asset prices go up. Understanding this is all we need to know to win out in a bear market (well there is more but this is a start.)
It goes without saying that none of us want to lose money. Right? With that being the case most of us would like to avoid the first stage where asset prices go down. However, this is a lot harder than it sounds.
Imagine you are in the market with all your assets living there happy asset life. Then the bear market comes... recession! Now what should we do? Well let's say we decide to sell our assets. So that's what we do and then the next day the asset price ends up going up.
Unfortunately in this scenario you may have just sold your asset for a loss. And then immediately missed the chance to buy at the bottom and in turn you have missed out on profits.
Now we have another investor. This investor doesn't directly care about the price of the stock or other financial asset. They have carried out there research and they are very confident in there business. This investor understands a recession or bear market seems to be beginning.
Even though this investor knows the recession is here, due to the confidence they have in their investment and their own analysis, they are not bothered by the asset price going down. Based on this investors analysis they know that the company they are invested in will survive the current recession.
With the additional knowledge of the first investor, the second investor knows not to sell and attempt to time the market. Instead, this investor continues purchasing the company they have great confidence in. This means as the market falls, the investor is able to lower their average cost per share (cost basis) and if the market rises, they are not missing out on any gains.
This strategy, is more commonly known as dollar cost averaging. Repeatedly purchasing assets you like on a regular basis irrespective of market conditions and stock price assuming the companies fundamentals remain the same.
Of course, if you are in a period where you assume the prices are more oversold then usual, then you could be trying to purchase more than you usually would while everything is essentially on sale.
Market Recovery
The stock market is a place that can never truly be predicted however we can look at historic events to gain an understanding of what may occur. For example, we can see the 2008 recession occurred in total over 3 and a half years in which the price managed to recover back to where it was at.
In that 3 and half years the S&P500 dropped approximately 50% and then to recover from those losses had to gain nearly 100% back. This means for all those who invested heavy during the recession period managed to nearly double there money in less than 3 and a half years.
Anyone who sold during that time may have locked in there 50% losses and likely would not have been able to time the bottom well. Using dollar cost averaging which will be discussed in the next section prevents an investor from locking in the losses in the recession and likely ensures they will make more money than if the recession hadn't occurred (making use of the somewhat fast recovery).
Dollar Cost Averaging (DCA)
Dollar cost averaging is an investment strategy that involves investing in a single asset (such as a stock) at regular intervals over time. This allows investors to buy shares when they are relatively cheap, and sell them when they are relatively expensive.
This strategy has been used successfully by many people who invest in stocks. The idea behind it is to spread out purchases so that you don’t put too much into one investment at once. If you buy $100 worth of shares every month, for example, you won’t feel the full impact of a big drop in the value of those shares right away.
The benefits of DCA include:
• You can take advantage of low-priced investments, which may otherwise slip through your fingers
• It helps even out volatility
• It reduces risk because you aren’t putting all your eggs in one basket
• It makes sure you always have money available for future investments
However, there are some disadvantages to using DCA:
• It takes longer to build up wealth
• It requires discipline
• It isn’t suitable for everyone
Dollar Cost Averaging History
The concept of Dollar Cost Averaging was developed in the early 1900s by Benjamin Graham, a Wall Street legend. He noticed that investors were often willing to pay high prices for stocks during bull markets, but wouldn’t consider buying them during bear markets.
He realized that investors should try to avoid being caught off guard by sudden changes in the market. So he came up with a way to make sure investors didn’t miss out on good deals.
Graham suggested that investors set aside a specific amount of money each week or month to buy securities. That way, they could take advantage of opportunities that arise without having to worry about whether the market is falling or rising.
Summary
Dollar Cost Averages are a method of investing where you regularly invest a fixed amount of money in a security. They are useful for reducing risk and making sure you always have enough cash to invest. They can help reduce losses from large drops in the market, since you will be less likely to panic and sell when things go south. I hope this article has also helped you understand that bear markets and recessions are not the end of the world as long as you play your cards right and don't make uninformed decisions.
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Thanks for Reading 😁
FAQ
What Is a Bear Market?
bear market is when prices of securities fall sharply, and a sweeping negative view causes the sentiment to further entrench itself. As investors anticipate losses in a bear market and selling continues, pessimism grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.
Source: (investopedia.com)
What Is a Long-Term Investor?
Long-term investors consider down markets as an opportunity to add to their portfolios. Before you can think about doing that, you have to think about what it means to be a long-term investor.
Source: (thestreet.com)
How Do You Get Rich in a Bear Market?
Down markets, bear markets, and stock market crashes put good companies on sale. If you have a company you believe in (and perhaps already own) you can buy shares fully believing you are making the right choice for your future, even if the bear market continues and stock goes down.
Source: (thestreet.com)
