5 Lessons From the Bear Market

5 Lessons From The Bear Market

One year ago, on March 23, the S&P 500 closed at its bear market low. Today, we are going to talk about 5  lessons we can learn from the bear market of 2020. 

Watch Now: 5 Lessons From the Bear Market

Can Spouses Start Social Secuirty Benefits at Different Times

Check Out Our YouTube Channel

Our YouTube Channel has over 100 videos on a variety of topics.  Click here to visit.  And while you are there, please subscribe.
Blog Post Alt Tag

Listen Now:
5 Lessons From the Bear Market

Subscribe Where You Find Your Podcasts

Blog Post Alt Tag

A year ago, on March 23, the stock market reached its bear market low caused by the COVID pandemic. Stock prices fell about 34%. Over the next 5 months, prices raced higher.

What are some of the lessons we can learn from going through this bear market? For some, it was their first bear market experience. For others, like me, it was not their first. (This was my fifth.) These experiences teach some great lessons. Here are 5 lessons from the bear market.

Bear Markets are a Temporary Interruption.

Bear markets are a temporary interruption to the permanent long-term advance of stocks. About one out of every five years, we see a significant decline in the stock market. It is a reset and a healthy adjustment. Once the stock market hits bottom, prices go on to recover and set new highs.

Since 1946, we have seen 14 bear markets. Every single one has recovered and created new wealth for those who are patient and continue investing in stocks. 

Most People Can't Outsmart the Market

It is virtually impossible for most people to outsmart the stock market. Did you think…

  • February 19, 2020 was going to be the current all-time high?
  • March 23, 2020 was going to be the bottom?
  • The stock market was going to recover as fast as it did?

I did not expect any of the above. I bought stocks two days before the market set the all-time high. We anticipated things to get worse before they got better. We thought that the shutdowns were going to cause even more damage to our investments than they did.

The stock market turned quickly and raced higher. The bear market ended in less than 6 months! We expected the recovery to take at least two years.

Many people try to guess the highs and lows. They look for points to sell and to buy. Doing this often leads to big mistakes, and those can impact your lifetime return.

Buying Stocks "On Sale" is Hard

Buying stocks in the middle of a bear market is very difficult. A year ago, many of these great businesses were trading at 30%, 40%, or 50% discounts. We had the opportunity to buy many of those stocks at prices we may never ever see again.

In the moment, you can say, “Stocks are low, buy now!” At the same time, the news tells you everything is bad and getting worse. How do you see the return potential in those moments? In the middle of a bear market, most people assume stocks are heading lower, and they are going to lose even more.

You Don't Lose Anything Until You Sell

We all looked at our accounts last year and watched the values sink. It was uncomfortable and unpleasant. It created a lot of stress. There is a natural reaction to want to sell when things are going bad. You want to protect what you have.

Until you make that sale, the decline is temporary. If you hold on to your investments, you will most likely recover from the decline.

Selling near market lows makes those temporary decreases in value permanent losses. It also makes erasing those losses very difficult.

A Bear Market is Always in Front of Us

Nobody knows when the next bear market will begin. We do not know how far prices will drop or how long it will last. Bear markets are a common occurrence in the stock market. On average, we see one happen every five years.

We hope it takes several years before we experience the next bear.  When it happens, we can use the lessons learned from our past experiences to make us all better investors.

Talk to a Certified Financial Planner™ Professional

 


5 lessons from the bear market

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts

10 Percent Doesn’t Mean 10 Percent

10 Percent Doesn't Necessarily Mean 10 Percent

When it comes to stocks, 10 percent doesn’t necessarily mean 10 percent. We will explain this and how setting reasonable expectations can make you a better investor.

Watch Now: 10 Percent Doesn't Necessarily Mean 10 Percent

Can Spouses Start Social Secuirty Benefits at Different Times

Check Out Our YouTube Channel

Our YouTube Channel has over 100 videos on a variety of topics.  Click here to visit.  And while you are there, please subscribe.
Blog Post Alt Tag

Listen Now:
3 Things to Know About Bear Markets

Subscribe Where You Find Your Podcasts

Blog Post Alt Tag

When young financial advisors go to financial advisor school, one of the first things they are taught is the stock market has an average annual return of 10% per year. This leads people to believe the stock part of their investments are going to improve by 10% each year. But, 10% doesn’t mean 10%.

Only two times in the last 96 years have we seen stocks return close to 10% in a calendar year (10.06% in 1993, and 10.88% in 2004). It is more likely the positive years are going to be much better. And, there will also be some negative years, too.

When you’re thinking about what could happen in any given year, you should expect anything. In the short term, almost anything is possible. But over a long period of time—20 or 30 years—expecting stocks to return 10% per year is reasonable.

Setting Reasonable Expectations

It helps to set reasonable expectations when you’re an investor. It helps you to understand volatility is part of the process. And, we also know there will be difficult periods you have to navigate.

For example, you should expect the stock market to be positive three out of every four years. And, you should anticipate one year in four will be negative. Those plus years are likely to be much better than the 10% average annual mark. The average up year is about 21%. The negative years average -13%.

Corrections

You should also expect corrections to happen at least once a year. (We may be in the middle of one right now.) The average correction is about -14%. But even with those interruptions, the market has continued to improve over time.

Bear Markets

You should also expect bear markets. We had one last year, and it was an awful experience. But, the stock market recovered, and the recovery happened a lot faster than any of us anticipated.

When we set reasonable expectations, we can make better decisions about our investments. It keeps us from selling at bad times. It may keep us from buying at bad times as well. Avoiding those key mistakes can help us improve our real-life returns.

Talk to a Certified Financial Planner™ Professional

 


insert here

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts