Your portfolio in a bear market: how to come out on top

Investing in stocks is not for the faint of heart. Unlike other asset classes like real estate where investors rarely experience extreme volatility, the stock market tends to test the emotional mettle of its participants.

And 2022 is only the last episode of the saga.

With the S&P500 declining by up to 23% since the beginning of the year and its highly technological cousin, the Nasdaq Compound, even worse, there are investors who will likely exit the market for good in the coming weeks (if they haven’t already). In fact, a recent Allianz Life survey found that 43% of investors are too nervous to buy stocks at current levels.

But if the goal is to buy low and sell high, why would investors hesitate to buy when stocks are cheap?

This is the investor’s dilemma. We all say we’re going to buy when the market is down, and yet when the opportunity presents itself, we struggle to pull the trigger. Here are three reminders to help you stay on track so your portfolio can get out of this bear market.

Image source: Getty Images.

Net equity buyers gain in the long run

One of the simplest reminders to calm your nerves during a bear market is that the market has never failed to recover from past crashes.

Consider the chart below that tracks the overall returns of the S&P 500 and Nasdaq along with their all-time highs over the past few decades.

^ SPX Chart

Data by Y-Charts.

This chart might be a little confusing at first glance, but it’s actually quite simple. The straight horizontal lines represent the time period between the historical highs of the two indexes.

There are two important points:

  1. Both indices have recovered from each crash to return to their all-time highs and climb even higher.
  2. There were long stretches of time for both indices before these all-time highs were reclaimed.

The second conclusion is not so uplifting, but it should actually be the biggest motivation to keep investing in bear markets. If you plan to wait for the market to recover to start investing, just know that you could be waiting more than seven years based on the longest rally in the S&P 500.

Worse still, tech investors who exited the market after the dotcom bubble missed nearly 300% of Nasdaq gains over the next 15 years:

^IXIC Chart

Data by Y-Charts.

Finally, here are some additional stats to help you stay a net buyer of stocks today:

  • Half of the market’s best trading days occur during bear markets.
  • Midterm election years tend to be brutal for stocks, but the average gain for the S&P 500 the following year is 32% (according to LPL Research).

Buying what you know gives you an edge

When the market gets me down, I often turn to the words of legendary mutual fund manager Peter Lynch.

He said the following about using your unique advantage when buying stocks:

People have amazing benefits and they throw them away […] If you had worked in the auto industry – let’s say you were a car dealer for the last 10 years – you would have seen Chrysler, invented the minivan. If you were a Buick dealership, a Toyota dealership, a Honda dealership, you would have seen the Chrysler dealership packed with people. You could have made 10 times your money on Chrysler a year after the minivan came out.

Lynch’s point is that instead of chasing after hot stocks, research companies in your area of ‚Äč‚Äčexpertise.

People are more than willing to invest money in industries they know nothing about because the rest of the market does, even when there are huge opportunities in their own areas of expertise.

So if you’re scared to put money in the market right now, consider looking at stocks where you have a unique edge. To be honest, that’s good advice in any market cycle, but it can give you the conviction you need to keep investing during downturns.

Put your hat against the tide

To be successful in investing, it can pay off to look at the market against the grain. And in a bear market, there are huge opportunities to buck the trend.

Right now, many investors are rejecting just about every tech company. The market is collectively saying that because inflation is higher and interest rates are rising, tech growth will stagnate for the foreseeable future.

Much of this is due to muscle memory of the dot-com crash when hundreds of companies went public with weak or non-existent underlying business models. But many of the tech companies that sold last year are very profitable and moving society forward in the digital world.

I doubt rising interest rates will significantly dampen this progress, and investors who buy quality growth companies at low prices will likely reap the rewards in the future.