“Be fearful when others are greedy, and greedy when others are fearful.”
— Warren Buffett -
Warren Buffet is right. But what does he mean? There is a fear of an impending recession; the Feds have continued to raise interest rates to tighten spending. So far this year, three banks (two in the US and one in Switzerland) have had some financial woes.
And there are even murmurings of a possible credit crunch. What's the possible impact on the stock market? In the short run, stock markets respond to macro econmoic shifts. There are three directions they can go;up, down or sideways.
What is a Bear Market?
There is a possibilty that we could experience a bear market. But what is a bear market?A bear market is when the stock market drops over 20% and stays down for two months or more.
Four things you can do in a bear market:
1. Bail out — and crystalize your losses.
Remember that paper loss remains paper loss till you sell. By selling out, you crystalize your losses. Of course, if you are holding an asset with no chance of recovery, you may need to sell it off- if it’s still worth anything.
2. Stay put.
If you don’t need to use your investments, chill, and enjoy the ride. Typically bear markets last for about a year. The last ten bear markets ranged from 99 to 622 days (1980–1982). The financial collapse between 2007–2009 lasted 517 calendar days.
After every bear market comes a raging bull market, you want to be positioned for that, don’t jump off the ledge because others are doing it.
3. Add to what you have.
If you’re sitting on a pile of cash, the best thing to do is add to your existing holdings that have dropped in value. By doing this, you are buying something at a discount. The other benefit is reducing your investment’s average adjusted cost base.
Rebalancing is an investment strategy of selling off what has made money and purchasing what has lost money instead. Gold is seen as a haven when stocks are crashing, and inflation rises.
For example, if your holdings in gold go up significantly (as we expect them to till inflation goes down), then you may rebalance — sell off gold and buy the stocks that have been hit badly in your portfolio.
What you can learn from this:
Stay diversified- there are four asset classes- cash, bonds, stocks, and alternative investments (e.g., gold, crypto, and real estat You need all four in your portfolio.
Avoid FOMO- many people who could not afford houses bought them, thinking things can only go up. The truth is that what goes up can and will come down. When it comes to prices, the higher it goes, the harder they fall.
Close your ears to hype. There was so much hype about crypto. But not enough education and governance.
On the other hand, realize that rarely is anything ever as bad as the news makes it out to be. News is meant to sell. And that’s what they do best. You don’t sell newspapers by being positive. It doesn’t mean we ignore reality but always check your sources.