3 Critical MISTAKES to AVOID while INVESTING in a DOWN MARKET. Easy STEPS to FOLLOW.
What’s up everybody this is Positive Finances where we talk about everything and anything that involves you and your money.
Many new investors are currently experiencing their first down bear market. I am here to tell you to relax and ignore all the fear-creating noise you are constantly hearing about the market. Seasoned investors all know down markets are part of the process when you are investing for the long term. You need to stay focused on the long-term result and not focus on short-term emotionally driven ups and downs.
Investors who have not yet learned to control their emotions when it comes to investing tend to panic as soon as they see any big drop in the stock market. One of the main things I have had to learn over the years is to set aside emotions and only make investments based on logic.
During times like this, I like to remind myself about some advice from one of the most successful long-term investors Warren Buffett. When he said, “Be fearful when others are greedy, and be greedy when others are fearful.”
With that said let’s go ahead and look at the 3 most common critical mistakes people want to avoid making during a down market.
1. Selling off long-term investments.
People sometimes hurry to sell their long-term assets as soon as they notice significant declines in the stock market. The truth is that, rather than liquidating your existing positions, you should probably aim to buy more of those long-term stocks. When you invest for the long term, it will take time for you to get a return on your investment. Therefore, what occurs today is less important than what occurs seven to ten years from now.
One of your options in a bear market, if you have extra money, is to increase your long-term investments and buy more shares while the shares are low and on sale. By acquiring more shares, you are lowering the average value of your original shares, and this will help you recover that much faster as the market recovers.
Let's just say you already own 50 shares of the S&P 500 by investing in VOO at $400 each, and the price of VOO drops to $330 each, by buying an additional 25 shares you would lower your average value down to $376 per share. With your combined 75 shares, the market only has to go up to $376 a share for you to recover and break even on your investment. Anything higher than $376 is pure profit.
Some of you might be asking yourself. Why would I buy more shares if the market keeps going down? With that in mind let's go to the 2nd critical mistake.
2. Believing that the market is always going to continue to decline.
People that are scared and think the market is going to always decline don't comprehend how the market behaves over extended periods of time, many people overreact to significant movements in the stock market. According to many reports, the S&P 500 has gone through 26 down bear markets since 1928. Each time, the stock value decreased on average by almost 36%.
Meanwhile, the up-Bull markets saw stock prices rise an average of 114% during its up recovery. History has taught us that maintaining onto and perhaps increasing your long-term investments during down bear markets can be one of the best things we can possibly do during a down bear market.
During a recovering bull market, the stock market gains outnumber the stock market losses.
So, if the bull market does so much better than the down bear market, then why are so many people losing money left and right in a down market? Well, that brings us to the 3rd critical mistake.
3. Not knowing the difference between long-term and short-term investments.
Experienced long-term investors do not get all caught up in short-term emotions. Time is on your side when it comes to investing as a long-term investor as long as you are invested in some well-diversified index funds. The S&P 500 for example, and many other good index funds, have all shown their ability to recover and set new records after previous bear markets we had in the past. Even after drastic negative markets such as the dot com bubble of 2000, the Great Recession caused by the real estate market crash of 2008, and the recent down market of Covid-19 pandemic in 2020. All historical data suggest that by making a long-term investment in U.S. stock indexes like SCHD, VOO and VTI you will eventually end up with long-term positive gains.
After hearing what I just said you are probably asking yourself. “If long-term investing in good index funds like VOO that tracks the S&P 500, and or funds like VTI that tracks the total stock market in the US always results in positive gains then why are some people reporting they are losing money?”
Well, the primary reason for that is people are losing money because they are most likely playing around with short-term investments or individual stocks. Short-term investing and especially short-term investing in individual stocks can be extremely risky due to the stock market's volatility.
Sometimes people think if they invest in a well-known company they will not have to worry about daily ups and downs. Short-term investors try to time the market and they tend to get in and out of their positions on a very regular basis. The stock market is so unpredictable, and if you are constantly trying to time it by getting in and out you are only going to cause yourself a headache and bring unnecessary stress into your life. You are going to end up risking the chance of accidentally buying high and selling low.
As I previously mentioned, there is a very good likelihood that your investment will be profitable if you hold it for long-term, and by long-term, I mean more than seven years properly invested in a reliable index fund. The chances of losing money are substantially greater when investing for brief periods of time in individual businesses. Some investors can make some money doing these short-term investments into individual companies, but they open themselves to potentially losing big, because of the volatility of the market.
Personally, I say short-term investing should only be for experienced investors that have learned to control their emotions and have a high tolerance for risk. They are going to need that high tolerance when it comes to being able to handle the drastic highs and lows the market can experience in the short term.
In summary, the best way to beat the market is by becoming a long-term investor. It should be noted that stock market investing requires you to be ready to stomach the ups and the downs. You should only take measured risks with short-term investments if you have the experience. Based off historical statistics if you want to be secure with your investments, then you can't go wrong with long-term investments in good index funds like SCHD, VOO and VTI.
The longest bull market in history was from 2009 to 2020 and that bull market saw a more than 400 percent increase in stock prices. Now keep in mind that bull market was out of the norm, because the typical bull market on average lasts around 2.7 years, and the average bear market lasts around slightly under 10 months.
