It's easy to get excited about investing in a bull market. Indices and stocks are doing strong. If you are a new investor, the quick gains may encourage you to keep investing. And if you've been investing for a while, you'll be happy to see your portfolio grow in value.
Bear markets aren't that easy. Whether you are a new investor or have been buying stocks for years, it is often difficult to decide what to do next. Today, the S&P 500 has lost around 20% since the start of the year. You may be wondering if you should buy more stock, sell some of your holdings or just wait. Which path to take? Let's find out.
Rising inflation and economic concerns
First of all, a few things about what is happening right now. Rising inflation, supply chain problems, the war in Ukraine and general economic concerns are weighing on investor sentiment. And some of these problems are hurting businesses as well.
For example, retail giant Amazon (Amazon shares - ticker AMZN) states that the cost of transporting goods in foreign containers has more than doubled compared to the pre-coronavirus period. This and other higher costs weighed on first quarter earnings. Target also suffered in the first quarter from inflation. Previously, both companies have experienced solid revenue and earnings growth over time.
But it is important to remember one important thing. Today's problems won't last forever, and strong companies have what it takes to weather the storm. History teaches us that the stock market has always recovered from dips and dips. And we know that periods of economic weakness are always followed by periods of growth.
All of this means that, in a bear market, the ideal would be to hold shares in companies that you believe in. And if you have the funds to invest, it's a great opportunity to add more shares of these long-term winning companies and / or to add new holdings to your portfolio. You can buy many solid and profitable companies at bargain prices.
For example, Amazon and Target are both listed at lower prices than they were a couple of years ago, but their revenues are much higher and continue to grow.
What about market timing?
Now, you may be wondering: what if the stock price losses continue in the weeks and months to come? How do I time the right moment?
It is virtually impossible to time an investment in order to buy at the lowest point and sell at the highest point. And since it's a long-term investment, that's okay. If you invest in large companies for at least five years, you are likely to be winners overall. So, if you believe in the history of a company today and the price looks good, it's probably time to buy.
Let's talk now about selling. In a bear market it is never a good idea. Potential future rebounds would be lost.
Of course, there may be exceptions. If you've already made money on an investment and don't believe it will go any further, then it might be time to sell. Or if you've lost faith in a company and truly believe your losses will worsen even after the market picks up, it's probably time to go out and look for better opportunities elsewhere.
Your decisions at this time also depend on your investment horizon and your risk tolerance. If you plan to stay invested for many more years, you may want to keep some higher risk stocks, even if you have already made money from these stocks. If your investment horizon is shorter or you want to be more cautious, you may want to consider selling and blocking your gains.
In general, in this difficult market, buying and holding are usually the best choices. Your wallet may not be raised right away. But these decisions in a bear market can help your portfolio grow over time.
