Risk and reward in a bear market

The past few months have seen stocks continue to slide, so much so we have entered a bear market! Several major stock indexes, including the Dow, Nasdaq, and S&P are down 20% from their recent highs; the technical definition of a bear market and causing investors to feel pessimistic. I know the feeling, and that feeling is pushing you towards exiting the market. That pessimism can lead you to sell your assets, locking in losses. Remember holding assets in decline doesn’t mean you lost money because you still have the asset but selling it means you sold it at a loss. With that in mind, I would encourage you to stay invested and if you can continue to buy for a few reasons.

Quick thought, there is the risk of a recession in the coming year, don’t panic. While terrifying, the damage will be limited; unemployment hits fewer people than inflation. More importantly, a possible recession means a chance for younger investors to get into the market and think of it as a wealth transfer to lower-income Americans who can enter the market at an affordable price.

1) The stock market has a good track record of returning capital. The S&P has averaged a returned of 9.89% over 30 years and is used as a proxy as it is the 500 largest companies.

2) Low Prices mean there are bargains for investors.

3) Lower prices mean less risk because future earnings increase. If you have two companies priced at 100 and 200, and their annual earnings are both 10, the one with the price of 100 is a better buy. The cheaper company is yielding 10% or a P/E of 10 compared to 5% or 20, so their future growth potential is better.

That said, I know it is hard to stay in, but again using the S&P as the gauge, which comprises the 500 largest companies, that index has only lost money in 30 years since 1927! In times of volatility, it is best to research companies you think might return or surpass their previous valuations or find market-tracking ETFs. I am partial to ETFs (market indexes that have a basket of stocks so they provide a diverse investment) that track the S&P, but there are plenty of others, and you should consult your planner or do your research that said, there is always a risk, and risk begets rewards. Invest wisely.