For most investors, the past 12 months in the stock market have been tough, to say the least. And trust me when I say I am far from an exception. While no one likes to see their portfolio decline, history has shown that markets are almost inevitable (and some would say necessary).
It’s not the first bear market to happen, and I’m willing to bet my last couple of quarters that it’s not the last bear market to happen. The smartest thing I did during this bear market, aside from coming to terms with the fact that bear markets are inevitable, was to rely on dollar cost averaging.
Embrace the inevitable
To give you an idea of the volatility of the stock market, let’s examine Standard & Poor’s 500. The S&P 500 tracks the 500 largest public US companies and is the primary benchmark for the stock market. So much so, that “market performance” is often used interchangeably with the performance of the S&P 500.
Since its inception, the S&P 500 has had negative years about a quarter of the time. Here are the negative years she has had since 2000.
For comparison, here’s how the S&P 500 has performed roughly since each year above (minus 2022).
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It is important to understand that bear markets are inevitable because it helps you move past short-term negativity and focus on your long-term goals. If time is on your side and you can focus on the long term, bear markets become opportunities rather than problems.
Look for opportunity in madness
If you made a lot of investments in the years leading up to this recent bear market when many stocks were overvalued, now may be an opportunity to lower your cost basis. Your cost basis is the average price you paid per share for a given stock. For example, if you buy 10 shares of stock at $200, your cost basis will be $200; If the price drops to $150 and you buy 10 more shares, your new cost basis will be $175.
The cost basis is important because it ultimately determines the amount of profit (or loss) when you finally sell the shares. With prices lower during a bear market, you can get some great companies “at a discount” and possibly lower your cost basis on the shares you already own.
Warren Buffett advises investors to be “fear when others are greedy, and greedy when others are fearful,” and bear markets generally indicate that investors are fearful. Instead of shying away from investing, here is the time to embrace falling prices to set yourself up for long-term gains. If you like a stock at $200 apiece, you should Is that true Likewise, at $150 per share.
Consistency is the name of the game
With the exception of a few months in the early stages of the COVID-19 pandemic, the stock market has been pretty much on the upswing for the past decade. It was mentally easier for me to invest during a bull market because my investments seemed to add up every week. In fact, I wanted to invest as quickly as possible so that I could have a chance to grow.
It was not so easy in the early stages of this current bear market. And against my better judgement, I sometimes found myself thinking, “Why invest now when you can wait for prices to drop further and get more bang for your buck.” And to be fair, that makes sense in a logical world. But the stock market doesn’t always work logically. That’s why I leaned so hard on dollar cost averaging.
Dollar cost averaging involves investing on a set schedule without regard to stock prices at the time. For example, you can decide to buy shares of an S&P 500 index fund every Monday, and when Monday comes, your job is to invest no matter what. In my case, I put myself on a schedule of making investments every two weeks.
Using dollar cost averaging and putting myself on a schedule ensures that I stay consistent with my investment rather than waiting for a “good” time. It also helped me ignore short-term price fluctuations in the stock market. Since I was on an investment schedule and the price was irrelevant to whether or not I was making bi-weekly investments, there was no need to keep up with the volatility. Talk about peacefulness.
Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.