You have likely heard the term “bear market” frequently used over the past few weeks. A bear market occurs when the market declines by 20% or more from its previous peak. And yes, that has happened recently.
Inflation is up. Gas prices are up. And we have experienced a bear market. We are reminded again of Paul’s words in 1 Timothy 6:17:
“Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment” (NIV).
Wealth is uncertain. The market is uncertain. When we put our hope in wealth and the market, our hope is unstable and unpredictable. The focal point of our hope is to be the never changing God. We can trust Him, even during financially turbulent times.
During bear markets, many make costly financial mistakes, impacting their finances ten, twenty, thirty years from now. It is important to remember that during bull markets (when markets are doing well), greed causes people to make poor financial decisions. In bear markets, it is fear that drives many to make financial mistakes.
So, what do you do during market downturns?
1. Focus on the long-term.
For many, the funds in their investment accounts are not needed this year or next year. They are looking to use the funds for retirement purposes, which may be several decades in the future. Wise investing is long-term investing. If you are not needing your funds for several years, consider this down market as a blip on your investment timeline. Don’t obsess over the short-term. Focus on the long-term.
2. Keep investing.
One of the biggest mistakes I witnessed in 2008 was people ceasing their contributions during the down market. You are probably familiar with the phrase, “buy low, sell high.” Now is the time when you get to buy low. For long-term investors, down markets are an opportunity to be taken, not a scenario to avoid. Dollar cost averaging is your friend, consistently investing month after month. So, don’t stop your contributions. Keep investing. For some, you may even want to consider increasing the contribution.
3. Ensure your investments are diversified.
Bear markets remind us of the importance of a diversified portfolio, broadly spreading investments to reduce risk. If your portfolio’s allocation became heavily weighted in one area over the past years, adjust your allocation.
It is important to remember that during bull markets (when markets are doing well), greed causes people to make poor financial decisions. In bear markets, it is fear that drives many to make financial mistakes.
4. Limit the number of times you view your account.
During down markets, reduce how often you view your investments. Frequent viewing can increase stress, fear, create a short-term mindset, and, potentially, result in costly mistakes. Do your heart a favor and limit the number of times you review your investments. Reviewing your investments once or twice per month (or even once per quarter) normally suffices.
Remind yourself market downturns are normal. Leading up to this bear market, we experienced an abnormally long bull market. This bear market was bound to happen. The good news is that, historically, bear markets are shorter than bull markets. Over the long-term, the market has provided positive returns for investors. Weathering downturns and investing during bear markets has, historically, proven beneficial. So, take some time and breathe. This is not the first bear market, and it will not be the last.
During bear markets, fear drives many to make poor financial decisions. Avoid costly mistakes by focusing on the long-term, consistently investing, keeping a diversified portfolio, and remaining calm.