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What we should consider in bear markets

Bear markets — a time when stock markets fall — are the biggest challenge investors will face.

Bear markets completely change the dynamics of decision-making and complicate all the usual challenges for a long-term investor.

We may find ourselves checking our portfolios even more frequently and feeling the urge to make irresistible short-term trades.

All investors must be able to navigate such demanding times. So here are some classic features of bear markets to consider.

They are inevitable

Bear markets are an integral part of stock investing. We know they will happen, but we cannot predict exactly why or when they will happen.

The long-term return on holding stocks would be significantly lower if there were no bear markets.

It will feel predictable

As stock prices fall, hindsight can go wild as people seek to make sense of the volatility.

It might seem obvious that this unstable environment would develop – the warning signs were everywhere.

But it can be too easy and convenient to ignore “red flags” during more stable times.

Economic and market news will be confused

The temptation to link economic developments to the outlook for stock market returns can become even more difficult to resist during a bear market.

As negative inflation or oil price news increases, investors may become more fearful.

It’s a vicious spiral – and one that a savvy investor should overcome.

Time horizons will contract

Being a long-term investor becomes even more difficult during a bear market.

Bear markets cause panic, which means that our personal “time horizons” shorten dramatically.

We stop worrying about the value of our portfolio 30 years from now and start thinking about the next 30 minutes.

Those closer to retirement age will find a bear market particularly destabilizing.

“There’s a common saying that ‘equities climb a wall of worry,'” says Rob Gardner, chief investment officer at St. James’s Place, “meaning it’s common for markets to go up, even when disturbing events like Ukraine occur.

In other words, despite the short-term fluctuations caused by world events, history shows that investing in assets such as stocks has proven to be the best way to grow capital and protect it from the worst. ‘inflation.

So hold on tight, don’t make any sudden moves in or out of money, and don’t be tempted to stop making regular pension investments, or withdraw from investing altogether.

Lower prices are good for long-term savers

Legal professionals often receive performance-related bonuses and with interest rates still relatively low, combined with market volatility, it can be difficult to find good advice on where to put your money.

A bear market can be a prudent investment opportunity to buy rather than sell investments by taking advantage of falling stock prices.

However, it is important to remember that seeking expert financial advice is essential if you are planning to invest a substantial bonus.

Our risk tolerance will be tested

Knowing your own risk appetite is one of the key principles to establish, from the beginning of the investment.

Everyone becomes risk averse when they lose money. The problem for investors is that experiencing a 37% loss is a far different proposition than seeing it presented as a hypothetical scenario.

Bear markets are the worst possible time to discover – and change – our risk tolerance.

If possible, remember your own underlying attitude to risk and avoid making sudden reassessments.

Every bear market will be different

During a bear market, it’s hard to see anything but bad news.

Our tendency will be to believe that things will continue to deteriorate – prices will be even lower tomorrow.

We should ignore all the charts comparing the current declines with other bear markets in history, they only promote this sentiment.

There is no reason to believe that such a deeply complex and unpredictable system should mimic the patterns of the past.

Bear markets are the ultimate stress test for investors

The fallout from bear markets often says more about us and how we react than it does about market recovery.

Two lawyers with identical investment portfolios during a bear market could have vastly different outcomes — and returns — depending on the decisions they make during that market.

The surest way for investors to sustain substantial and consistent losses is to jump from high risk to high risk and make bad, impulsive decisions.

The best thing to do is to think in terms of decades, not days. Good financial advice can help you drown out some of that noise.

Get good advice. Keep your cool.