Author, Serial Entrepreneur, Real Estate Investor, Stock Trader & Co-Founder of The Ligon group.
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One of the most frequently asked questions about investment analysis is, “What happens to my long-term investments during a bear market or recession?” Many companies and business leaders use the stock market as an investment choice for their companies, retirement accounts, and IRAs.
Whenever the stock market enters correction or recession territory, business leaders and investors who take positions in major U.S. stock indices begin to wonder what to do next. Should you bail or go down with the ship? The first thought is that if the market falls, you will lose money. However, as a seasoned stock trader and investment analyst, I believe this is just a perception of the present moment in time. Let’s zoom out and take a 30,000 foot view of what, in my experience, really happens when the market starts to enter bearish territory.
You haven’t committed any losses yet…not yet.
Just because the stock market is entering a bearish market doesn’t mean you’ve lost money. You lose money when you close your positions. This means that even though your investments have fallen, you have not locked in any losses until you sell them at a loss. This is an important distinction. If you hold long-term investments, you should think about your overall goal before making a reactive decision. What is happening today is very different from what may happen ten years from now.
Time is your ally.
A bearish market lasts only a fraction of the time a bullish market lasts. A bullish market lasts an average of 32.4 months and a bearish market only lasts about 10 months. In addition to a much longer bull market, it also yields a higher percentage of gains (about 112% per bull market) versus the losses of a bear market (about 32.5% per bear market). The longest bull market started in 2009 and lasted until 2020, and it resulted in a gain of over 400%. Relying on historical data as a business leader is essential to making informed decisions about your investments.
All stocks are for sale.
When the stock market enters bearish territory and US indices fall, all blue chip stocks are dragged down to record lows. Large US companies inadvertently cause a super sale on all stocks. Now might be a good time to consider buying. There’s a timeless saying that goes, “Buy low, sell high.” Well, areas of correction and recessions present opportunities for massive discounts on major blue chip stocks and US stock indices that you won’t get at any other time. So in addition to adding stocks to your existing holdings, you can expand your overall portfolio at prices you may never see again.
How to prepare
As a business leader and investor, avoid drastic changes; modest and more conservative. A great way to weather the storm of a bear market is to diversify your accounts. Keeping 10% to 20% of your total portfolio in cash will give you options in a down market. You can choose to enter new positions at discounted prices or simply add to your current positions. If you expanded your current positions, you could create a more favorable cost base for your total investment.
Here’s an example: Suppose you own 10 shares of XXX Company at a cost of $20.00 per share, and you lost 20% during a bear market. Your shares are worth approximately $16.00 per share. If you were to buy five more shares at $16.00 a share, you would adjust your current cost basis to about $18.67. Now, instead of holding 10 shares for $20.00, you have 15 shares for $18.67, which puts you in a more favorable position for your long-term investment.
The takeaway
When the stock market enters correction or recession territory, it can be a scary time for many people and companies. Panic-like decision-making and emotional reactions to market movements can be devastating to your investments, so do your research. You can use historical data to develop bear market strategies. Understanding how the market moves over a long period of time is paramount to your investment objectives.
During this time, entering new positions and adjusting your current cost base as described above can provide excellent opportunities for increased profits over time. Increased winnings equal more money, and more money equals more options. Small adjustments during a bear market can lead to large gains over a (long-term) investment of five to seven years. As a business leader, you may choose to close stock positions from time to time to liquidate assets for working capital. If you took advantage of some of these bear market opportunities, you might be able to close out only the newly adjusted positions, yielding profits without affecting your original investments. Those newly acquired funds can be used for business growth. Some of the world’s most profitable corporate leaders and equity investors have increased their wealth in bear markets.
In the wise words of Warren Buffet, “If you’re making a good investment in a security, it shouldn’t bother you if they close the stock market for five years.” Long-term investments should be viewed exactly as you intended them to be: long-term.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.
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