Disclaimer: This article should not be considered as financialadvice. You are responsible for your own financial research and decisions.
After a decade of a raging bull market many investors have experienced only minor stock market corrections. Stock market prices have consistently risen and most investors could do no wrong. The COVID-19 pandemic has changed all that and has resulted in a bear market, where investors do not know where the bottom is, nor how long it will last.
There is a common misconception that investors, and those who haven’t yet started their investment journeys, believe and it’s that ‘now is a bad time to buy stocks’. As I have previously written, the present time is a great opportunity for many investors.
However, in this post I wanted to talk about the pitfalls to avoid if you are currently invested in the stock market. This can be a dangerous time for many investors, as fear and instinct try to override logic and this drives many investors to panic-sell.
1. This is The Time To Buy, Not To Sell
Many investors know that investing is for the long-term and if you want to make money in the stock market you have to be willing to stick it out in volatile times. Even if it seems like the end of the world is coming and that we are in an apocalyptic scenario.
This is especially the case currently, during the COVID-19 pandemic, when every TV channel and radio station is only reporting on the increase in cases, fatalities and increased lockdowns across the world. Some are even saying this could be financially worse than the Great Depression of 1929. However, it’s still important to remember that over-time the market has always trended up over the long term.
Trying to time the market might seem like a good idea but often those who try it end up losing out. Missing out on the stock markets best days and significantly reducing their investment returns. This is not to mention the fact they’re buying low and selling high.
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2. Not Investing More Now for Future Returns
Managing not to sell is one hurdle, the other is actually maintaining or increasing investment momentum to take full advantage of the suppressed market. If you can buy at a 20% discount, history shows that following a bear market, the stock market can increase by as much as 124% in the following year.
| Peak | Trough | Duration (months) | Bear market magnitude | Recession during bear? | 1-Year return after trough |
| 9/3/1929 | 7/8/1932 | 34 | -86% | Yes | 124% |
| 3/10/1937 | 4/28/1942 | 61 | -60% | Yes | 59% |
| 10/9/2007 | 3/9/2009 | 17 | -59% | Yes | 68% |
| 3/24/2000 | 10/9/2002 | 31 | -49% | Yes | 34% |
| 1/11/1973 | 10/3/1974 | 21 | -48% | Yes | 38% |
| 11/29/1968 | 5/26/1970 | 18 | -36% | Yes | 44% |
| 8/25/1987 | 12/4/1987 | 4 | -34% | No | 23% |
| 5/29/1946 | 6/13/1949 | 37 | -30% | Yes | 42% |
| 12/11/1961 | 6/26/1962 | 6 | -28% | No | 33% |
| 11/28/1980 | 8/12/1982 | 21 | -27% | Yes | 58% |
| 2/9/1966 | 10/7/1966 | 8 | -22% | No | 33% |
| 8/2/1956 | 10/22/1957 | 14 | -22% | Yes | 31% |
| 7/16/1990 | 10/11/1990 | 3 | -20% | Yes | 29% |
| 09/20/2018 | 12/24/2018 | 3 | -20% | No | 37% |
| Average | – | 22 | -39% | – | 47% |
Source: ISI, Bloomberg, National Bureau of Economic Research, Haver Analytics, FMRCo (Asset Allocation Research Team) as of February 26, 2020. Data based on S&P 500 Index price returns. Duration ends with a complete retracement of losses. Recessions are defined by the National Bureau of Economic Research.
3. Selling Too Early on The Winning Stock Investments You Make In The Bear Market
One final challenge when buying a winning stock at a reduced price is that you may be tempted to sell once the market recovers. Especially if you are tired of the volatility which can last up to 37 months. However, picking a stock that has survived through a difficult time, is likely to be a strong competitor with a deep moat. This competitive advantage may pay dividends in the future, literally and metaphorically speaking, especially if the competition has been reduced.
Index Funds
However, if like me you currently invest in index funds, it’s important to remember that this is part of a long-term investing plan. With this in mind, index funds are self-cleansing and you don’t have to worry about the survival of these individual stocks. The companies that have weakened or even gone bust will drop out of the portfolio, to be replaced by more successful and adaptable organisations.
An Historical Example: Apple
You might find this an interesting time to add individual stocks to your core investment plan. You could diversify your portfolio with some potential winning stocks. One famous historical example of this is Apple during the 2008/09 bear market when they lost over half their value and their share price decreased to $11 per share.
In early 2020 their share price had climbed to $325 per share. If you purchased 100 shares at $11 dollars and sold them at $325, you would have made a profit of $31,400. Even now their shares are still worth $229, after a significant drop. This is without the dividends or any reinvestment of dividends you might have made.
- 100 x $11 = $1,100
- 100 x $325 = $32,500 – original investment = $31,400.
- 100 x $229 = $22,900 – original investment = $21,800
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