May 03, 2018
When stocks fall at least 20 percent it signals a bear market. One of the best investment tips I can offer you is to root for a bear market for stocks.
Yes, you read that right. And no, I have not lost it. Falling stock prices can be one of the best ways to build long-term wealth.
Some perspective to hold close for when the next bear strikes: Bear markets are a natural part of the long-term investing landscape. No bull market (rising stock prices) lasts forever, and then when stocks get too pricey, or worries about the economy take hold, we experience a bear market. In the past 70 years there have been 12 bear markets and the average loss has been more than 30 percent.
But all bear markets come to an end, and then the stock markets get back to making money. For example, many of you were investing during the severe bear market of 2008-2009, when stocks lost more than 50 percent. If you were smart and just stuck to your investing strategy, you did great. From the end of that bear market through the end of March, 2018 the S&P 500 stock index had gained more than 330 percent. And that’s been the pattern throughout history. After bear market loses, stocks rebound and move on to great gains.
I get that living through a bear market can feel stressful, but I am asking you to dig deep and when the next bear market hits, use it to your advantage.
The Bear Facts to Building Wealth
If you are investing for a goal that is at least 10, 20, 30 or 40 years off, continuing to invest during a bear market is an incredibly smart move. Buying stocks during a bear market is akin to shopping at your favorite store when everything is on sale. You would jump at a store advertising “Everything at least 30% off.”
A bear market is your chance to buy stocks on sale. The money you invest during a bear market will buy more (cheaper) shares. The more shares you own, the more money you will make when stocks rebound.
Let’s say you own a mutual fund that has a $20 share price. You invest $100 in this fund every month. That means right now you can buy five shares ($100/$20.). Then a bear market hits and the fund’s share price falls to $14. You have two choices: panic and stop your $100 monthly contributions or keep investing.
If you keep investing your $100 monthly investment could buy more than seven shares. That’s what is so great about bear markets: your money buys you more shares.
Now let’s jump ahead 15 years. Stock values have gained plenty over that long stretch. Your fund’s share price is now $30. Your five shares would be worth $180. If you had seven shares you would have $210. By continuing to buy shares during a bear market you accumulate more shares. The more shares you own, over time, the more money you will make.
I hope you will be smart, and make the most of the next bear market, by continuing to invest during the bear market. That will put you in great position to make the most of the bull markets that follow.