Are there Benefits of a Bear Market?
Cheap Stocks = Massive Gains Over Time
If you act effectively, by not selling and rather continuing to purchase stocks, the more bear markets you experience as an investor, the higher the probability that you’ll retire with a bigger nest egg. Years of underperformance tend to be followed by years of overperformance and those years of underperformance present a great opportunity to purchase shares inexpensively.
Other Investors Are Scared of the Stock Market
A simple reason why so many investors and even professional money managers are scared of the stock market–in the short term is stock prices can seem arbitrary. Up one day and down the next, watching the ticker every second the market is open can cause one to wonder just what the heck is going on.
In the short term, stock prices reflect all kinds of noise. The Fed Chairman says this or that, unemployment numbers come out, or more recently a virus spreads across the world, any of these cause the stock market to react in many ways. The point is that in the short term (About one year or less), stock prices are often the result of factors that do not necessarily reflect the long-term value of the enterprise.
When viewed long term, however, the market truly does reflect the underlying value of public companies. By long term, I mean really long term (10+ years). Stocks can be undervalued or overvalued for a decade. But given enough time, stocks will reflect the underlying value of the corporation that issued the security.
Boost your savings rate
A stock market crash can have a ripple effect on other areas of your life. For example, you may get laid off from your job, have limited access to credit or have a tough time getting clients for your side hustle. For these reasons and more, it’s important to be prepared and have cash saved up.
Experts recommend saving three to six months of expenses in an emergency fund, others as high as 12 months. While this may take some time, there’s no harm in starting to save more as soon as you can.
With increased savings, this will help you weather a storm if the stock market should crash. See last weeks post on maximizing savings.