The Surprising Reason You Should Fight Your Own Instincts in a Bear Market


Fight or flight is a natural survival mechanism. But history teaches us that holding on during periods of volatility is the best way to build wealth over time. It’s tempting to fight a bear market by reorienting your investment strategy towards what’s working at the moment, or to sell everything and clear your head.

Here’s why defying instincts is one of the hardest parts of investing, but why it can be an essential quality for patient long-term investors to master.

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Disadvantages of the “fight” response

Actively fighting a bear market involves trying to navigate your way through the volatility by doing things you wouldn’t normally do, like rotating underperforming sectors (like consumer discretionary, communications, and technology) and in sectors that are doing well right now (like energy and utilities), or worrying more about the next quarter than the next five years.

Hedge fund managers can lose clients in a bad quarter. But as an individual investor, all you need to worry about is meeting your long-term financial goals, which reduces pressure on short-term market fluctuations and makes it easier to weather periods of volatility.

There’s a big difference between positioning your portfolio for long-term success and actively fighting a bear market. The first is a valid exercise regardless of the market cycle.

For example, a company’s long-term investment thesis can change for several reasons. He could have a weak balance sheet, lack positive cash flow, or earn less money, which could force him into debt at a higher interest rate. Perhaps the company is losing market share to a better positioned competitor with deeper pockets. Consolidation is a common result of economic downturns, as companies with more resources have the means to swallow up smaller companies that are vulnerable to macroeconomic factors.

While an investor shouldn’t change their whole approach just because the stock market is down, now is definitely a good time to make sure you’re investing in companies you understand, believe in, and have good chance to grow for decades to come.

Disadvantages of the “leakage” response

For many investors, the growth stock bear market of 2021 and 2022 is the longest bear market of their investing career. And now that the S&P500, Nasdaq Compound, Nasdaq 100and the Russell 2000 are all in bear markets (i.e. a pullback of at least 20% from the all-time high), and the Dow Jones Industrial Average is only one percentage point away from a bear market, fears of an extended bear market are growing.

^ SPX Chart

^SPX given by Y-Charts

Each passing day can impact an investor and make the urge to sell and walk away even more appealing. But history tells us that bear markets can create life-changing buying opportunities for people who have the patience to ride out the storm.

It’s one thing to look at history and realize that selling during a bear market has so far never been the right long-term decision. But when you’re in the thick of it, it helps to have a few things to fall back on.

For me, the best approach is to simplify the situation: does the company have the fundamentals to survive several quarters of negative economic growth? Will it take market share in a recession or lose it? How vulnerable is it to short-term challenges, and do these challenges affect the long-term investment thesis?

If you do this exercise enough, chances are you’ll find that many industry-leading companies look like attractive buys, while many smaller companies whose growth has been largely attributed to low capital expensive and rising stock prices that facilitated equity financing are in dire straits. precarious situation.

The benefits of standing still

One of the best approaches for most investors might be to choose their favorite brand companies and own them. It’s a beautifully simple strategy that also helps you sleep at night. No matter how big the selloff, you can rest easy knowing that these big companies have been through a recession before and often come out stronger on the other side.

Despite decades of wisdom and access to an unlimited treasure trove of information, many investors fail to beat the market primarily because they make a simple mistake, such as fighting or fleeing a bear market. As difficult as it is to do nothing and stand still in a bear market, it is the most effective and easiest way to accumulate wealth over time. Avoiding mistakes such as selling an asset at a bargain price is just as important as making good decisions.

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