It’s hard to stand by and watch your investment portfolio decline. But the best course of action in a bear market is often no action, coupled with an average dollar exchange rate at lower prices over time.
Investors looking for ways to expend nervous energy have come to the right place. Here are five steps you can take now that should help you take control and chart a path to financial well-being.
1. Make a watch list
It’s easy to run out of money during a bear market when you’ve already bought the dip on many of your favorite stocks. Rather than jumping in and out of stocks to try and get the best deal, a better approach is to create a watchlist of companies you’d like to own once you have the resources to do so.
People also read…
A watchlist brimming with excellent stocks at spot prices serves a purpose. It also adds an incentive to increase your savings rate and save with a purpose. It takes a certain amount of arbitrariness out of the equation because you pre-determined what to buy. And a watch list helps keep savings and investments on track so you don’t get caught up in the heat of the moment and make impulsive decisions — which is all the more dangerous in a bear market.
2. Think five years ahead
Like a watch list, thinking five years ahead is a great way to avoid the pitfalls of market volatility. Too much noise can cause an investor to consider what’s happening in the economy now or next quarter. Inflation may last longer than expected. But eventually the business cycle should normalize and the economy should grow again.
In this vein, the goal is to find companies that can make it through this period – even as profits and margins fall – and support long-term growth. Those are the kind of companies that should be added to a watch list.
3. Understand that volatility is just the norm
Every bear market is different. But in general, the stock market is going down for good reasons. In this case, inflation, rising interest rates, ongoing supply chain problems, geopolitical tensions and a slowdown in economic growth are all headwinds that often hurt businesses. Given the weak near-term outlook, it makes sense that stocks would fall — or at least stop rising.
However, it doesn’t seem logical that many strong companies have really suffered huge losses. A prime example is the leader in e-commerce and cloud infrastructure Amazon (NASDAQ: AMZN), which is down more than 40% from its all-time high. The company faces a number of challenges, but they don’t seem big enough to warrant such a major downward move in its share price.
Especially to new investors, the idea that the value of a well-known global company like Amazon could be worth hundreds of billions of dollars in a matter of months or even weeks can seem shocking. But volatility is simply the price of admission to the stock market. The sooner an investor accepts the inevitability of volatility, the easier it will be to buy and hold stocks and unlock the power of compound returns over time.
4. Try not to get caught up in the daily price action
When prices move fast, it’s hard not to keep up with the daily price action. A good rule of thumb is to only check the market when you are about to make a decision, such as putting savings to work and buying a stock on your watchlist. If you are not about to make a decision, controlling the market is of little use other than fostering concerns or false confidence.
5. Prioritize your financial health and well-being over market performance
One of the reasons people often check the market is because they compare the performance of their own portfolio to the market S&P 500‘s or de Nasdaq compositerather than focusing on their long-term goals. Healthy competition is good. But in the end, all that matters is that you take advantage of the power of compound interest over time and use it to get closer to reaching your financial goals and building a large enough retirement nest egg.
Benefits of making a plan now
One silver lining of this bear market is that it will be a great learning experience for newer investors. But for now, the bear market sell-off may get worse before it gets better.
By making a plan now, an investor can stay one step ahead of the sell-off and cope with further volatility rather than getting carried away by the chaos.
10 Stocks We Like More Than Amazon
When our award-winning team of analysts has a stock tip, it pays to listen. The newsletter they’ve had for over ten years, Motley Fool Stock Advisorhas tripled the market.*
They just revealed what they believe are the top ten stocks investors can buy right now… and Amazon wasn’t one of them! That’s right – they think these 10 stocks are even better bargains.
*Stock Advisor returns from June 2, 2022
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, serves on the board of directors for The Motley Fool. Daniel Foelber has no position in any of the listed stocks. The Motley Fool holds positions in and recommends Amazon. The Motley Fool has a disclosure policy.