Don't be down about the market. Here's how to use it to your advantage.
Investors love bull markets. A bull market means the stock market is rising, which is what stock investing is all about, right?
That's a bit simplistic, and there are reasons why investors should embrace bear markets when prices aren't rising so quickly too. Here's why.
The advantages of a bull market
One of the primary purposes of investing is to grow your wealth. However, success in investing usually is the result of remaining invested over a long period of time. Stocks that appreciate thousands of percentage points -- or more -- do so over long periods, not overnight, and most definitely not in one year. However, most of their growth happens during bull markets, when the market is optimistic and everyone is buying.
The downside of a bull market is that valuations can become very high quickly, constraining buying opportunities. Eventually stock prices fall back, but great stocks rarely lose all of their gains. Even when they lose a massive amount, they typically gain it back, and more, when a bull market returns.
The advantages of a bear market
There are varying definitions of a bear market, but one of the more standard ones is when the market decreases 20% from its previous high. It doesn't get back to a bull market until it surpasses its previous high. Last year we entered a bear market, and although the S&P 500 is up 12% this year and has been even higher, we are still officially in a bear market. You can see from this chart when the market began to climb after crashing in 2020 and stayed elevated until last year.
^SPX data by YCharts.
When stocks are down in a bear market, that's the time to buy. One of Warren Buffett's most famous quotes is "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." That's because when others are greedy, prices go up and often hit unsustainable levels. Drops are almost inevitable. Bear markets, when valuations deflate, correct prices and are prime stocking up opportunities.
No one likes to see the value of their portfolios decline, but bear markets provide a window to leverage the decreases and maximize opportunities.
Use both to your advantage
There are many different approaches to investing. One of them is a "set and forget" mentality. If you evaluate a company and determine that it's a worthwhile investment, you can buy the stock and more or less move on for decades. While this could result in some losses, it also shields you from the anxiety and fear that could accompany frequent or daily stock checks. There are bound to be ups and downs, bull and bear markets, black swan events and more throughout your investing journey. Great businesses will weather all kinds of storms and reward you eventually.
Image source: Getty Images.
Even if you take a more hands-on investing approach, where you buy and sell more regularly, you'll do your best investing when you make your decisions based on the company itself and not on external factors. Instead of ignoring the external environment, you can use it to your advantage by leaning into what the market can provide for you. In bear markets, it will be buying great stocks at low prices. That is likely to require being able to see the bigger picture. Some examples of excellent stocks at low prices, but with excellent free cash flow generated by the underlying business, to buy today are Home Depot, which is trading at a valuation of 18 times trailing 12-month earnings, or close to a 3-year low, and Chipotle Mexican Grill, which is trading at a price-to-earnings ratio of 45, or near half its five-year average.
CMG PE Ratio data by YCharts.
Once you've identified the top stocks for your portfolio, part of the process is ignoring the noise in the background. What you don't want to do is panic sell when prices go down. It doesn't matter if we're in a bear market or a bull market; hold on to great stocks through thick and thin, and you're likely to come out on top.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Home Depot. The Motley Fool has a disclosure policy.
FAQs
Be fearful when others are greedy, and be greedy only when others are fearful. In other words, bear markets are often the best time to buy.
Where is the market headed in 2024? ›
Analysts project 11.5% earnings growth and 5.5% revenue growth for S&P 500 companies in 2024. Fortunately, analysts see positive earnings and revenue growth for all eleven market sectors this year.
Is the stock market still in the bear market? ›
However, the index only recently finished recouping its bear-market losses and today sits just slightly above its January 2022 peak. With potential economic threats remaining and market uncertainties looming in 2024, investors may still need to have patience before a truly durable bull market can get underway.
Is 2024 a bull or bear market? ›
The S&P 500 soared throughout the year and finally reached a new high in January 2024, making the new bull market official. The onset of a new bull market has historically been a very reliable stock market indicator.
What is a famous quote about the bear market? ›
WEAK MARKETS
- “In bear markets, stocks return to their rightful owners.” ...
- “The key to making money in stocks is to not get scared out of them.” ...
- “In the midst of chaos, there is always opportunity.” ...
- "Market corrections are the price of admission to the wonderous theme park called the stock market."
One thing to keep in mind during bear markets is that you aren't going to invest at the bottom. Buy stocks because you want to own the business for the long term, even if the share price goes down a little more after you buy. Build positions over time: This goes hand in hand with the previous tip.
Should I pull my money out of the stock market? ›
Unlike the rapidly dwindling balance in your brokerage account, cash will still be in your pocket or in your bank account in the morning. However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.
What is the expected return of the stock market in the next 10 years? ›
Optimistic: 6%-7% per year.
If you assume margins and P/E multiples will remain at their current high level, and expect sales and buybacks to grow at their historical rates, then you can anticipate making about 6% in returns per year over the next decade.
What is the stock market forecast for 2025? ›
These figures compare with analysts' consensus forecasts of $244.70 in 2024, $279.70 in 2025 and $314.80 in 2026. Portfolio managers have embraced a number of investing themes that are driving solid gains this year. Think of this factor as evidence that Wall Street's "animal spirits" are alive and well.
At what age should you get out of the stock market? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
The duration of bear markets can vary, but on average, they last approximately 289 days, equivalent to around nine and a half months. It's important to note that there's no way to predict the timing of a bear market with complete certainty, and history shows that the average bear market length can vary significantly.
How to make money in a bear market? ›
But you can maximise your chances of a profit in a bear market by following bearish-friendly strategies. These include diversifying your holdings, focusing on the long-term, taking a short-selling position, trading in 'safe haven' assets and buying at the bottom.
Will 2024 be a good year for the stock market? ›
While there could be a growth slowdown in the first half of 2024, experts believe growth should resume in the second half of the year. Americans faced many financial challenges this year, from persistent inflation to increasingly expensive debt.
Will the stock market continue to go up? ›
Most analysts remain optimistic that the S&P 500 will continue advancing. The average analyst price target for the S&P 500 is 5,925.80.
What kind of market are we in? ›
Last year we entered a bear market, and although the S&P 500 is up 12% this year and has been even higher, we are still officially in a bear market. You can see from this chart when the market began to climb after crashing in 2020 and stayed elevated until last year.
What did Warren Buffett say about the market? ›
In Warren Buffet's annual letter to Berkshire Hathaway investors, Buffett compared today's stock market to a casino, with investors buying and selling rapidly in the hopes of winning big. “For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young,” he wrote.
What should investors do in a bear market? ›
Keep investing consistently.
By investing a fixed amount of money at regular intervals regardless of market conditions, you're more likely to be able to purchase equities at more affordable prices and potentially see the shares rise in value once the market rebounds.
Why not to sell in a bear market? ›
Opportunity cost: In a bear market, investors who sell their positions to avoid further losses prevent gaining potential gains when the market recovers. This is known as opportunity cost and can result in lower returns over the long-term.
What happens to stock prices in a bear market? ›
A bear market is a financial market experiencing prolonged price declines, generally of 20% or more. A bear market usually occurs along with widespread investor pessimism, large-scale liquidation of securities and other assets, and a weakening economy.
