Bear markets can be exasperating and stressful and challenging, but they can also be excellent educational experiences. Avoid these nine bear market financial mistakes.
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Financial Mistakes: Bear Market Tips
A course that appears solid during the bull phase may seem a lot weaker when the going gets tough. Hopefully, these common mistakes will help you avoid any slip-ups.
Rush to Sell Stocks
The nature of investing is risk-averse, and particularly in a bear market, it’s tempting to sell stocks and cash out.
Cash feels safe, but it’s not always the answer to your financial issues, especially when saving for retirement or for the long term.
Stocks won’t stay low forever, and recovery can potentially be quicker than you think. Getting back in can also cause losses if done at the wrong time. It takes discipline to stick a long-term plan.
Assume Past Movements Will Match Current Ones
One of the first things investors do when checking investments is to compare previous cycles and current conditions. There could be some sort of link, but times change, and companies change.
It’s good to use analogs to question conditions and examine probabilities, but never assume that current movements will match or closely follow those in the past.
Use the comparatives to assess your investment process, but don’t use them as your investment process.
Reach for the Biggest Gains
Investing in risky stocks to get the most significant gains can lead to disaster. Build protection into your portfolio and manage the risk.
Ensure you have a balanced range so that any future economic downturns don’t affect your investments too much.
Have Emotional Attachments
Some people can hold on to stocks for too long because of an emotional attachment they have to them. This “endowment effect” means we attribute a higher value to the things we own.
Listen to warning signs, such as underperformance against peers, as you would with a stock you didn’t own. Don’t ignore the alarm bells because you have some form of an emotive tie. When the charts start to turn negative, consider your options and move on to other things.
When you enter a position, have an exit plan clearly laid out.
Not Focussing on Hard Evidence
Do not base decisions on anecdotal evidence. A good investor always separates the hard evidence from the circumstantial evidence. Use subjective information to get an idea of the bigger picture and then drill further into the evidence to validate what you hear or see. Anecdotal evidence should not drive your investment process on its own.
Use trend models to provide price evidence and validate anything anecdotal.
Closing prices will not provide you with much information other than what happened on the day. Instead, connect short-term signals with long-term trends.
Think about the timeframe of the trends and overarching movements and themes related to daily pricing. If you’re a long-term investor then you should assess and think on long-term price movements, not make decisions on short-term movements.
As a long-term investor, you should stay focused on the long-term – that’s the goal
Follow Bear Market Rallies
According to Investopedia, “a bear Market Rally refers to a sharp. short-term price increase in a stock or market amid a longer-term bear market period. Investors can sometimes misinterpret bear market rallies as markers of the end of a bear market, and so they must be treated with caution.”
They are fierce and extremely volatile often making the investor feel they have already missed out when huge spikes occur. Often investors are sucked in only to be let down by a crazy rebound.
Instead, look at long term trends and investments that have longevity.
Listen to the Narrative
Don’t be biased over particular stories that you hear in the media. Much like having an emotional attachment, separate regular connexions you might see often, with fact. For example, oil and stocks are positively correlated. They are among many separate and complex variables in the markets.
Narratives are useful to inspire you to dig deeper, but they should not be taken as fact.
Forgetting Forget Your Own Performance
As time passes investors are likely to forget their own mistakes and overestimate their past performance. Hindsight bias could cloud your judgement.
Try using a diary to track your wins and losses and your thought process behind your actions. This can be something to refer back to and remind yourself what went right or wrong and use the information to do even better next time.
Financial Mistakes in a Bear Market – Are you an investor? Have you made mistakes or know anyone that has? Please tell us in the section below.