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.
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5 Lessons From the Bear Market
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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.
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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.