How to Handle the Bear Market
How to Handle the Bear Market
It’s been a wild ride on Wall Street, to put it mildly. We’ve had to bid a tearful goodbye to the longest bull market in history, and the events of the last week have left many of us reeling.
What exactly happened, and what should you do about it?
First of all, and this is important:
Please, don’t panic.
I don’t know if I’ve ever said that phrase more often or meant it more sincerely than I have over the last few weeks. From the COVID-19 scare to the market’s nose dive, right now people are understandably rattled… but we don’t make good decisions when we act in fear.
In fact, biology plays a huge role in why we make bad decisions when we’re anxious or afraid. Decision-making occurs in the prefrontal cortex of the brain. That’s where we problem solve, weigh risk and reward and conduct long-term planning.
Anxiety and fear wreak havoc on the prefrontal cortex, which has a strong negative effect on our ability to make decisions.
Not only that but the prefrontal cortex also helps us regulate emotion. So a nasty catch-22 can occur when we panic, make a bad decision, panic even more… you get the picture. The more we panic, the harder it is to stop panicking.
What’s Happening on Wall Street, and Why
What we’re seeing in the stock market is multifaceted but I suspect that the greatest factor in the fall (which included the Dow’s biggest one-day plunge since the 1987 crash) had to do more with investor panic than actual global events.
All of which can be explained by the prefrontal cortex.
The coronavirus outbreak has taken a toll on world markets and has shut down manufacturing in some places. Businesses may also suffer if people self-quarantine and avoid their usual activities.
However, these are not long-term situations.
And unless a company can’t withstand a temporary period of loss or it can’t bounce back from coronavirus (and I can’t think of a single example off the top of my head), then it’s reasonable to assume that your holdings will rebound in the future.
Coronavirus panic is not the new norm… it’s a bump in the road that’s likely to pass as the cold and flu season ends.
Other Factors in the Market’s Drop
On the other hand, there are several factors that point to the fact that we were due for a market correction, and there have been events that played into the drop that have nothing to do with COVID-19.
For example, near the beginning of the market tumble, oil prices dropped by up to 30%. Failed negotiations between Russia and Saudi Arabia led to a surplus of oil on the market, which triggered the initial fall.
Later in the week, President Trump’s announcement that the U.S. would be limiting air travel drove oil prices even lower.
It’s also worth mentioning that the market has been overvalued for some time and many experts have warned that a correction was on the horizon. While no one could have predicted the effect that coronavirus has had on the economy, there have been predictions for months that a market correction was on the way.
In fact, in August of 2019 72% of economists were predicting a recession by or in 2021. Trade tensions, the spread between 2- and 10-year Treasury yields and struggling markets in China and Europe are among the reasons for these predictions.
What Should I Do About My Investments?
Whether or not you should sell investments now depends heavily on what you’re invested in and how soon you plan to retire. As always, it’s wise to consult with your financial professionals before taking action. However, overall, I’m going to refer right back to my earlier statement:
Please, don’t panic.
Should you sell your stock? “Don’t do it,” writes Daniel Kline at The Motley Fool. “Yes, the market has been a roller coaster of ups and downs over the past three weeks, but long-term investors expect that to happen from time to time.”
In general, if you don’t sell your stock for less than what you bought it for, you won’t lose money. You can make yourself sick watching it go up and down, or you can wait it out and know that, while it might take a while, the market will eventually rebound.
And while others are loading off their assets…
You can actually pick some up right now, and potentially benefit — offsetting the losses in your portfolio.
On the Positive Side, Bargains Are Plentiful
When you aren’t panicking, you have the opportunity to take full advantage of your ability to plan ahead, make long-term decisions and weigh risk and reward… all critical skills for good investing.
There are some incredible bargains to be had for the savvy investor. As Warren Buffett’s mentor, Benjamin Graham, said:
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
Hopefully, the market will rebound quickly and we will see a marked reduction in coronavirus as the cold and flu season comes to an end.
Until then, I hope you’ll join me in encouraging your circle of influence to resist panicking, be patient and use this as an opportunity to expand your portfolio with an eye toward long-term growth.