If you are like most investors, you carry a few scars from past bear market experiences. And you may be asking the following questions, “What happened to get us here, and how do we make it through?” Answering these questions logically is the easy part. Not making knee-jerk reactions marks the differences between long-term success and financial failure.

Let us start with the basics – when we hear the term “bull market,” that means the market is going up. And when we hear “bear market,” our investments are falling. So, what exactly is a bear market?  A bear market is defined as a 20% drop from market highs. And generally, you will see the S&P 500 market index performance being used as a reference point.

What then causes bear markets to appear? Bear markets are caused when investor fear or uncertainty reaches significant levels. Investor fear can be caused by a multitude of possible events or situations. For example, the COVID-19 pandemic caused our most recent 2020 bear market. Other historical causes have included poor investor speculation, reckless lending practices, inflated oil prices, and more.

No one enjoys watching their account values go down, and bear markets can certainly be very scary times for investors. With that in mind, here are two rules you use when investing in a bear market.

Remember investing is about the journey; it is not a sprint. One of the worst things you can do in a bear market is to make knee-jerk reactions to market movements. The average investor significantly underperforms the overall stock market over the long run, and the primary reason is moving in and out of stock positions too quickly. When stocks plunge and seem as if they’ll keep falling forever, it’s our instinct to sell “before things get any worse.” Then, when bull markets happen and stocks keep reaching new highs, we put our money in for fear of missing out on gains. It’s common knowledge that the main goal of investing is to buy low and sell high, but by reacting emotionally to market swings, you end up doing the exact opposite. Invest using a disciplined process. When you focus on your process and don’t get caught trying to move to cash or time the market, you succeed. Remember that more things could happen that often do, and you want to have a process that protects your nest egg and grows your wealth.

Opportunity is still present.  When bear markets hit, it’s true that companies often go out of business. One of my all-time favorite Warren Buffett quotes is, “When the tide goes out, that’s when we find out who has been swimming naked.” In other words, when the economy goes bad, companies that are overleveraged or don’t have any real competitive advantages tend to get hit the hardest, while high-quality companies tend to outperform. During uncertain times, it’s important to focus on companies with clean cash flows and durable competitive edges.

Times are turbulent and making emotional decisions can be more costly than you think.  At Financial Enhancement Group, we stand ready to assist investors when they navigate bear markets.

Want to sign up to receive the Market Carver?

Schedule a "Next Steps" Meeting

If you request a “Next Steps” meeting, we will discuss with you things you should do today, things to consider tomorrow, and if we choose to partner together… a written plan on what Financial Enhancement Group can do to help meet your goals.

Receive Our Free weekly Market Update Video

The FEG team regularly shares pertinent financial information to help educate our friends and families on what’s happening in the market, as well as information on financial planning. Fill out the form below to be added to our list for distribution.

Access all of our checklists!

Important Update

Due to health and safety concerns for our families, friends and our team, we have made the difficult decision to temporarily close our offices in Lafayette, Brownsburg, Indianapolis and Anderson until January 4, 2021. Our team will remain available to you by phone and email to continue to offer you assistance with your service requests. Please do not hesitate to contact us with any questions you may have.

Questions? Give us a call at 1-800-928-4001.