Let's be honest, the last 12 years have been a tremendous bull run and anything you invested in made you money. After all, everyone is a genius in a bull market. Bear markets are a little different though, and many of us have never invested during one.
"It's only when the tide goes out do you discover who's been swimming naked" - Warren Buffett
Who knew a 91 year old enjoyed skinny dipping? Ew, just had a gross visual. Come on Chris, get it together.
So what does this Buffett quote mean? I can explain using what we've seen over the last few years. With the Federal Reserve maintaining low interest rates and treasury yields below the rate of inflation, we started to see the "TINA" investing strategy. "TINA" stands for there is no alternative.
Basically, you could put your money in a bank account or purchase bonds and see your money lose value, or you could invest that money in the stock market. Now, we all know the markets were on fire but here's a look at the S&P returns over the past few years:
2019 saw 29% returns, 2020 saw 16% returns and 2021 saw 27% returns. So 2% yield on bonds or 20% yield on stocks, excluding dividend yield. Seems like a no brainer, right?
Well, that's how everyone felt and we saw record inflows into the markets. According to CNBC, 2021 saw $1 trillion in total ETF flows.
Now, what happens when people think the S&P is the safest investment? Well, they start to go further down the risk curve. After all, higher risk, higher reward:
That's exactly what happened over the past few years. We started to see large investments in speculative stocks including SPACs, a record number of options traded and every crypto going to the moon.
But what happens when the tide changes? Well, let's look at some charts.
Here is the chart for Cathie Wood's flagship ARKK fund over the past 5 years. The fund invests in high growth and speculative assets:
Here is a chart for the IPOX SPAC index:
Lastly, a look at the crypto total market chart:
What do all three charts have in common? They all fell roughly 50% since the start of 2021 and are in bear markets. A bear market is 20% down from the highs. So if you invested during that time, you would be feeling some pain.
Now, let's look at the S&P 500 over a similar time frame:
You'll notice the index kept rising in 2021, so the "safer" play would have paid off.
What are we seeing in 2022 though? The S&P entered correction territory in February. A correction is when the market is down 10% from the highs. I believe a bear market is possible in the near future, so here's how you should be investing.
DCA and chill
I started investing in 2008 when I started my career and opted into the 401(k). I didn't know anything about investing, all I knew was money was taken out of every check and invested for me. Little did I know this was the best strategy in the world; dollar cost averaging (DCA).
We've covered dollar cost averaging numerous times, but the main takeaway is that you consistently invest in index funds or great companies every single month, regardless of what's going on in the market. By doing this, you limit your risk and provide the best opportunity for your money to grow over time.
The graphic from our Instagram depicts the benefit of dollar cost averaging perfectly:
This is absolutely the best thing you can do during a bear market, bull market, kangaroo market or any type of market at all. Continue dollar cost averaging no matter what. Remove the emotion and fear of "losing" money and stick to the long term plan.
If you are new to investing or looking for an app to automate your investments, we highly recommend M1 Finance.
In bull markets, valuation doesn't seem to matter. This is due to greed and ignorance. As I like to say, valuations don't matter until they do, and they always matter in the end.
Here is the Buffett indicator, which shows the historical market valuation vs the current valuations. Moral - the valuations always revert to the historical trend line sooner or later:
Over the past few weeks, there has been a rotation into value names. Berkshire Hathaway, Procter & Gamble, Johnson & Johnson, Lowe's, General Motors are just a few names. If you are interested in our favorite dividend stocks, here's our list of 5 dividend stocks to buy and hold forever.
If you focus on quality and value during these times, you will do extraordinarily well.
This is a term I've used many times when it came to investing. Not sure if it's commonly used, I heard it somewhere or I made it up, but I love it and will continue to use it.
When a stock falls, no one knows where the bottom will be. So what I like to do is start nibbling when I think the bottom may be near. Nibbling is when you build positions slowly and buy small increments over time. You are essentially taking small bites and testing the waters.
Nibbling is different from DCA because you are in fact trying to time the market. I only suggest this method with a small portion of your portfolio and in quality names that you want to own for years to come.
By nibbling, you are not putting all your money to work in a specific stock. It allows you to keep purchasing if you are wrong about the bottom. I have done this over the years and there are several FinTech names I began nibbling on recently.
Bear markets can certainly be scary times for investors and nobody enjoys watching the value of their portfolios go down. But there can be opportunities to put money to work for the long run. Dollar cost average in index funds, invest in quality value stocks, and find great companies you want to hold for decades and build positions.
If you follow these steps, you will be successful and survive any bear market. Not to mention you won't have to worry about swimming naked next to Warren Buffet. Gross.
These are the companies we have partnered with this year. They make this blog possible so go check them out!
Coinbase - cryptocurrency exchange - get $10 in free Bitcoin when you buy your first $100
BlockFi - cryptocurrency exchange - get up to 8.6% interest on your crypto
Personal Capital - personal finance platform that helps users take control of their finances by blending world-class technology with human advice. Pair industry-leading financial tools with licensed advisors and full-service planning experts across all 50 states
M1 Finance - the future of finance in a sleek, modern app. Rated #1 for Sophisticated Investors by Investopedia, users can enjoy: free investing, high yield checking, low rate borrowing, automation, and optimization
TrueBill - app that helps people gain awareness about their spending habits and better manage their money. Truebill makes it easier than ever to manage subscriptions, lower your bills, and stay on top of finances & budgeting
Canva - design software that makes design simple, convenient, and reliable. Create what you need in no time! Jam-packed with time-saving tools that make anyone look like a professional designer
Credit Karma - your credit scores should be free. And now they are. Check your scores anytime, anywhere and never pay for it. Save smart with Credit Karma.
Beagle - helps you find your old 401(k)s. Also helps you rollover & consolidate your 401(k)s in to a Beagle account, which gives you access to your retirement money early with no tax or penalties.
I am not a licensed financial advisor or financial professional. This is not investing advice. I am simply sharing my research and opinion based on that research. It is very important that you do your own research and make investments based on your own personal circumstances, preferences, goals and risk tolerance.
This blog contains some affiliate links. If you purchase any service through one of these links, I may earn a small commission at no extra cost to you.