Bear Markets Part 3: How You Should React
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3 Attitudinal Principles
Previously, in our Behaviour Gap series of articles, we discussed the 3 attitudinal principles to successful investing. They are recounted here in the context of proper behaviour during a bear market.
1. Faith In The Future
If we want to capture all of the market upside, we must be willing to sit through all of the downside. This is illustrated by a $1,000 investment made in 1945 in the S&P500. It would be worth over $1.5 Million dollars today if left alone to grow with all dividends reinvested, despite having 13 bear markets in the interim. Faith in the future, one of the 3 attitudinal principles, is based on the fact that the market has always recovered from downturns and moved higher (see following graph). Therefore, we should not be concerned about bear markets if our portfolios were designed with a long term horizon.
If we try to “time” the market, we will not be able to consistently predict the beginning and end of the next bull market. This will cause us to suffer from the “Behaviour Gap” (discussed in our previous series). So instead of wanting to do something because we hear and read about all the bad news during a bear market, we should stay focussed on the long term goals of our financial plan. If they haven’t changed, then we don’t need to change anything. This requires patience, the second of the 3 attitudinal principles. Patience gives us the ability to avoid doing something inappropriate during a bear market.
Staying invested and not selling during a bear market is the only proven strategy that captures all of the market gains. Additionally, we need to continue on with our plan of making regular cash contributions to our portfolio so that we can buy stocks during these periods of discounted pricing. In fact, it may make sense to increase the amount of contributions during this opportune time to buy stocks at a discount. This calls for discipline, the will to do the right thing in the face of adversity, which is the last of the 3 attitudinal principles for successful investing.
We should not be concerned about our investments during a Bear Market, because history tells us that it will be temporary (faith in the future). Whatever we may have lost on paper will be fully recouped and more if we wait for the Bull Market to return (patience). Applying discipline will keep us fully invested and continue on with our contribution plan so that we can buy stocks at reduced prices during a Bear Market. To help us manage through our emotions, we should rely on our investment advisor as our Behavioural Coach to prevent us from committing one of the Eight Great Mistakes which can cause irreparable harm to our portfolio.
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This article was prepared solely by Chad Ekren who is a registered representative of iA Private Wealth, a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). The views and opinions, including any recommendations, expressed in this article are those of Chad Ekren alone and not those of iA Private Wealth. Capital Concepts and Capital Concepts Group are personal trade names of Chad Ekren. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.