FREE NEWSLETTER
LAST YEAR WAS MY first bear market. I’ve been thinking a lot about it and about the astonishing stock market recovery that followed, so I’m better prepared for next time around. Here are three lessons I learned in 2020:
Lesson No. 1: Buy aggressively when markets fall. When the market crashed last February and March, I invested more in stocks. But I regret not having invested a lot more, despite having cash available. In hindsight, I should have been much more aggressive. Even though I had set myself some guidelines about how much to invest in a bear market, I was worried about “catching a falling knife,” as Wall Street pundits put it.
True, this was one of history’s fastest recoveries after one of the quickest crashes, so there was little time to react. Yes, stocks could have taken longer to rebound. Still, I shouldn’t make excuses: I have decades of investing ahead of me and a market that’s down 30% is already a great buying opportunity.
Lesson No. 2: It’s tough to stick with what you know when emotions run high. “There’s a difference between knowing what you’re supposed to do, and actually having the nerve to do it in the moment,” writes Maria Konnikova in The Biggest Bluff, where she details her journey to becoming a professional poker player.
It’s one thing to know the strategy and a whole different story to be prepared mentally, she says. I knew the theory: When the market falls, you should double down. But with the whole world apparently going crazy and stocks falling at unprecedented speed, it was harder than I expected to stick with what I knew was right. Indeed, with the stock market plunging day after day, it was difficult enough to make my regular investments, let alone buy more.
How we feel affects how we act, says Konnikova. To guide my actions, I now have a written plan to refer to, which includes specific actions to take at certain times, regardless of my feelings. I’ll also have this article printed out to review, in case I have second thoughts about acting. Will this prevent me from sabotaging my own strategy? I can’t say for sure, but it’s better to have a plan than no plan at all.
Lesson No. 3: All-time highs are a great time to invest. When I started investing, I chose actively managed funds, because I was worried about the S&P 500’s rich valuations. The roaring bull market that started in 2009 surely had to stop at some point, I told myself. And with financial pundits saying U.S. stock were overvalued, I didn’t feel at ease buying index funds and hence indiscriminately purchasing a broad swath of the stock market, with no regard to each company’s valuation.
I’ve since changed my mind. Last August, J.P. Morgan published research analyzing the S&P 500’s return if you invested at all-time highs and comparing those results to what happened if you bought on other days. The counterintuitive conclusion? Buying at all-time highs has historically led to better performance.
Marc Bisbal Arias holds a bachelor’s degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows. Follow Marc on Twitter @BAMarc and check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Buying during market lows works great. I did this in 2008-9, in 2011, and in 2020, and got very good returns. But the difficulty I have is figuring out when/whether to hold money out of the market so as to have cash available for buying during a future low. Actually, I’m having that problem right now.
As soon as you mentioned “hindsight” you lost me. The point is that we have no hindsight at the moment. As another noted, the market could have kept on falling and you would have looked like a genius by not investing. The best plan of action is to have a plan and stick to it. Even a poor plan is likely better than one who keeps changing their investment plan based on the latest new trend. For investing cash, I’ve seen investment plans such as “for every x percent drop in the market I will invest y percent of my cash,” which seems a sensible plan of action if you have a lot of cash to invest.
Is this the right strategy for the average investor as opposed to regular, steady investing over many years? I can see some 401k participant trying to time the market moving funds around.