Bear markets are rarely easy or pleasant, and they can be even more difficult when accompanied by an inflation spike. For many members of Generation Z (people born between 1997-2012), the bear market of 2022 has been particularly challenging. Read on for tips as you invest during a bear market.
Learning From Your Frame of Reference
In many regards, the most difficult bear market is the one you first experience. Your frame of reference influences your views and opinions, including when it comes to finances. While it may be easy for someone who has experienced multiple bear markets to “stay long the market,” it can be challenging to take that same view if this is the first dramatic decline you’ve experienced.
So, if you’ve found this bear market to be particularly disconcerting or anxiety-inducing, just know that it’s natural to feel that way — especially if you don’t have a lot of experience with bear markets. What is important is to learn from the experience and create a plan of action.
Market Timing Is Likely to Be Counterproductive
One of the important lessons many investors learn over time is to avoid attempting to time the market. The temptation to try to “sidestep” market declines by moving holdings to cash can be very hard to resist, but countless academic studies have shown that such attempts are much more likely to hurt your financial returns than to help.
Take Advantage of a Bear Market by Dollar Cost Averaging
Instead, studies have shown that some courses of action opposite to market timing, such as dollar cost averaging, result in positive financial outcomes in a bear market.
When an investor employs a dollar cost averaging strategy, a fixed amount of money is invested at regular intervals (often monthly) regardless of market fluctuations. This way more shares will ultimately be purchased with the same amount of funds as prices decline. This strategy effectively automates “buying the dip” after a precipitous decline in financial markets.
When markets recover, the extra shares purchased during the downturn will help financial returns compound faster.
Systematic investment plans that involve deferring income to 401(k) plans or funding Roth IRAs with automated monthly bank drafts are also great ways to take advantage of a bear market by dollar cost averaging. Gen Z should prioritize setting up automated investing sooner rather than later.
Harness the Power of the Eighth Wonder of the World
Compound interest has been called the 8th wonder of the world, and Warren Buffet has attributed much of his success to the power of compound interest.
The best way to make compound interest work for you is to start investing as early as possible.
If an investor begins investing $500 each month at the age of 30, the sum could compound to $745,179 by age 60, assuming an 8% annualized rate of return.
If the same investor instead started investing $500 each month at age 22, that sum would have grown to $1,477,155 by age 60. A mere 8 years of compound interest makes a huge difference in total gains. Gen Z has the advantage of time on their side even in a bear market.
If It Sounds Too Good to Be True, Then It Probably Is
An important part of the equation above is the 8% rate of return over multiple decades. While an investor utilizing low-cost stock market index funds should achieve that return, it’s very common for investors to become their own worst enemy by pursuing unproductive investment strategies that impair financial returns.
Unfortunately, the popularity of many such strategies skyrocketed during the pandemic, with many investors drawn to the prospect of achieving astronomical financial returns in a very short period. Examples of these investment types include portfolios comprised entirely of technology stocks, “meme stock” strategies, and cryptocurrencies.
It pays to be very cautious anytime an investment strategy promises astronomical returns. Typically, astronomical returns equate to astronomical financial risk that just does not make sense.
While you may hear stories about the lucky few who hit it big with risky strategies, the reality is that a great many more have failed and gone to zero.
Be Realistic With Your Financial Plan
So, the next time you find yourself with a severe case of FOMO (fear of missing out), think about all the times money has been lost pursuing strategies that are too good to be true. Realistic underlying assumptions are critical to a sound financial plan.
Staying objective isn’t easy – the human mind can allow fear and greed to drive financial decisions. Some people are adept at maintaining objectivity during times of tumult, but many stand to benefit from working with a CERTIFIED FINANCIAL PLANNER™ professional who has the experience and expertise to prevent fear and greed from taking a toll on your portfolio, especially in a bear market. You don’t have to wait for a certain age to start working with a CFP® Professional – find yours today.