“Be fearful when others are greedy, and greedy when others are fearful.” — Warren Buffett once said to investors.
Warren Buffet is right. But what does he mean? You may be freaking out right now — the numbers are reflecting that. The Dow Jones is down by almost 20% year to date. The S&P is down by over 23% for the same period. Officially bear market territory.
What is a bear market?
A bear market is when the stock market drops over 20% and stays down for two months or more. The Dow Jones and the S&P are officially in bear territory.
Things are not as bad across the border, in Canada, with the Toronto Stock Exchange down by just over -10% — not excellent, but not as bad, for now.
Crypto has been bleeding. Bitcoin, the largest digital currency, is down 53% from January. And Ethereum is down almost 70%. Some coins have lost 95% of their value, wiping billions of dollars of wealth.
Four things you can do in a bear market:
Bail out — and crystalize your losses.
Remember that paper loss remains a paper loss till you sell. By selling out, you crystalize your losses. Of course, if you are holding an asset with no chance of recovery, you may need to sell it off- if it’s still worth anything.
Do nothing.
If you don’t need your money now, sit back, chill and enjoy the ride. Typically bear markets last for about a year. The last ten bear markets ranged from 99 to 622 days (1980–1982).
The financial collapse between 2007–2009 lasted 517 calendar days.
After every bear market comes a raging bull market, you want to be positioned for that, don’t jump off the ledge because others are doing it.
Add to what you have.
If you’re sitting on a pile of cash, the best thing to do is add to your existing holdings that have dropped in value.
By doing this, you are buying something at a discount. The other benefit is reducing your investment’s average adjusted cost base.
Rebalance.
Rebalancing is an investment strategy of selling off what has made money and purchasing what has lost money instead. Gold is seen as a haven when stocks are crashing and inflation rises.
For example, if your holdings in gold go up significantly (as we expect them to till inflation goes down), then you may rebalance — sell off gold and buy the stocks that have been hit badly in your portfolio.
What can you learn from this?
Stay diversified.
There are four asset classes- cash, bonds, stocks, and alternative investments (e.g., gold, crypto, and real estate). You need all four in your portfolio of assets.
Align your assets according to your tolerance for risk.
If your current asset mix is too volatile and keeps you up at night, consider your portfolio riskier than you're comfortable with. Stocks are generally more volatile than bonds, both of which are more volatile than term deposits and cash.
While your stock holdings may be down, consider reducing that part of your portfolio once it's recovered. So that the next time the markets are going through a correction, it won't make your stomach turn knowing that you're not heavily exposed to stocks. But remember, you may not be able to achieve the goals you hope to by eliminating risk.
Know the difference between speculation and investing.
Crypto is pure speculation. Investing means putting your money in stocks in companies with a long track record - like banks, utility companies and hi-tech firms that have been around for a long time.
Avoid FOMO.
Many people who could not afford houses bought them, thinking things could only go up. The truth is that what goes up can and will come down. When it comes to prices, the higher it goes, the harder they fall.
Ignore the hype.
There was so much hype about crypto. But not enough education and governance.
On the other hand, realize that nothing is ever as wrong as the news makes it out to be.
News is meant to sell. And that’s what they do best. You don’t sell newspapers by being positive. It doesn’t mean we ignore reality but always check your sources.
This article was written by Jennifer Thompson.
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