A Bear Market is defined as “A condition in which prices fall 20% or more from recent highs”.
The talking heads loudly proclaimed we were in a bear market on December 24th, 2018. We were nearing the final days of one of the worst quarters in the last 10 years and the doom and gloom prognosticators were all over the TV telling everyone to get out before it gets worse. Certainly, it was a rather difficult time to be optimistic in the face of all the negative talk. Note, I said negative talk not negative economic data.
We just finished the single best quarter in ten years with investor optimism again reaching lofty levels. One might ask why? Especially considering many of the talking heads have shifted their chatter to a coming economic recession. I have no doubt we will in fact face another recession at some point especially with the world economy slowing. Long-term investors understand the stock market and that the economy is never a one-way street upward. Short-term investors are not really investors, but in a sense are gamblers.
When panic selling occurs, as on December 24th, there is usually an explanation. Basically, panic selling can be described as get out at any price. Panic selling is an emotional reaction to fear of losing rather than evaluating the fundamentals. I can’t think of a better time to “buy” select closed-end funds (CEF) than during these periods. In declining markets, CEF discounts tend to widen as investors sell first and ask questions later, which may cause CEF’s to underperform. This dynamic of widening discounts means that the CEF underperforms not because the NAV performed worse but because the share price fell faster than the NAV. It may be counterintuitive to many but purchasing underperforming CEFs as a result of the widening is typically an
attractive buying opportunity.
Really, it is the fear of the unknown. When the Federal Reserve tightened interest rates In Dec 2018 it helped cause the sell off. The Fed has been very clear that the rate hikes are over, at least for the foreseeable future. China is still a wild card, but as talks progress investors are clearly becoming less and less fearful of an all-out trade war. The Mueller investigation created political uncertainty with impeachment talks. Jobs and earnings growth continue to be above expectations with rather strong numbers and the trade deficit improved with exports rising .9% and imports falling 2.9%.
Understanding these lessons can help block out the noise and stick to your investment plan no matter where the market is heading.
Education is one of the best investments that you make especially when it come to your financial situation. Learning about saving and investing for retirement is easier today than ever before thanks to the internet.
Continually save and invest
The idea of saving and investing a fixed amount regardless of what the market is doing is known as dollar cost averaging (DCA). DCA cuts down the volatility over the long-term by spacing out the investment and diving the amount of money invested equally. This allows the investor to buy more when the market is low and less when it is higher.
Maintain the long-term approach
Investments held for longer periods tend to exhibit lower volatility than those held for shorter periods. The longer you invest, the more likely you will be able to weather low market periods. Although short-term fluctuations seem random, the stock market tends to reflect the overall growth and productivity of the economy in the long run.
Understanding returns can make your portfolio evaluation easier. How your investment returns compare to the overall market can be a good indication if your strategy is working. You should also understand the difference between capital appreciation and dividend returns when picking investments as many investors tend to overvalue the dividend return.
Do Pay attention to fees
There is no avoiding fees in the investment world but that does not mean you should ignore them. With some basic research you can figure out how much you are paying for investment services and how they compare to similar ones. The fees may seem small but over the long-term they can diminish your returns