For most investors, the past 12 months in the market have been difficult, to say the least. And believe me when I say that I am far from an exception. While no one likes to see their portfolio go down, history has shown that markets really don’t have to (and some would say they need to).
It’s not the first bear market that’s happened, and I’m willing to bet my last two quarters that it’s not the last bear market that will happen. The smartest thing I did in this bear market, aside from understanding the fact that bear markets are inevitable, was relying on dollar cost averaging.
To give you an idea of stock market volatility, let’s explore S&P 500. The S&P 500 tracks the 500 largest US public companies and is the primary measure of the stock market. That’s because “market performance” is often used to refer to the performance of the S&P 500.
Since its inception, the S&P 500 has had negative years about a quarter of the time. Below are the negative years it has had since 2000.
|The year||Annual return|
For comparison, here’s how the S&P 500 has performed for each year above (minus 2022).
|The year||Annual return||Back Because|
|2000||(9.10%)||System efficiency 195.08%|
|2001||(11.89%)||System efficiency 245.66%|
|2008||(37.00%)||Legal benefits 355.33%|
|2018||(4.38%)||System efficiency 51.15%|
Understanding that bear markets are inevitable is important because it helps you overcome short-term negatives and focus on your long-term goals. If time is on your side and you can focus on the long term, bear markets become opportunities instead of problems.
Look for opportunity in the madness
If you invested heavily in the years leading up to this most recent bear market when many stock prices were overvalued, then now may be an opportunity to reduce your cost basis. Your cost basis is the average price you paid for a particular stock’s shares. For example, if you bought 10 shares of a stock for $200, your cost basis would be $200; if the price drops to $150 and you buy 10 more shares, your new cost basis will be $175.
Cost basis is important because it ultimately determines how much you make (or lose) when you eventually sell the shares. As prices drop during a bear market, you can get some great companies at a “discount” and potentially reduce your cost basis on the stocks you already own.
Warren Buffett advises investors to “be fearful when others are greedy, and greedy when others are fearful,” and bear markets often indicate that investors are fearful. Instead of avoiding investing, here’s the time to embrace falling prices to set yourself up for long-term gains. If you liked a $200 share, you should live like that at $150 per share.
Consistency is the name of the game
Except for a few months in the early stages of the COVID-19 pandemic, the stock market has largely been in a downward spiral for the past decade. It was much easier for me mentally to invest in a bull market because my investments seemed to increase weekly. Honestly, I wanted to invest as much as I could so that my money would have a chance to grow.
It wasn’t so easy in the early stages of this current bear market. Against my better judgment, I have sometimes thought to myself, “why invest now when you can wait for prices to drop a little more and pay off for you.” And to be fair, it makes sense in a logical world. But the stock market does not always work logically. So I focused heavily on dollar cost averaging.
Dollar-cost averaging involves investing in a specific program that ignores stock prices at that time. For example, you could decide every Monday to buy shares of an S&P 500 index fund, and when Monday comes around, it’s your job to decide what to invest. In my case, I put myself on a schedule to make bi-weekly investments.
Using dollar-cost averaging and putting myself on a schedule ensured that I stayed consistent with my investment instead of waiting for a “good” time. It also helped me to ignore short-term market price fluctuations. Since I was in an investment program and the price didn’t matter whether I made my bi-weekly investments or not, I didn’t have to keep up with the change. Talk about peace.
Stefon Walters has no position in any of the stocks listed. The Motley Fool has no positions in any of the stocks listed. The Motley Fool has a disclosure policy.