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Don’t Be Afraid of a Bear Market

The stock market has stayed strong for close to a decade now, and along the way, it’s produced impressive returns for stock investors. Yet this far into a bull market, the biggest fear for many people who are considering putting money into stocks is that they could end up investing at exactly the wrong time: right before a bear market hits and devastates their portfolios.

Bear markets are inevitable, and you have to be willing to endure them in exchange for the opportunity to get life-changing wealth from your investments during the stock market’s upward moves. Fortunately, there are ways to prepare for bear markets that can make it easier to get through them when they hit. You can even boost your overall returns if you’re willing to use some smart investment strategies that others may be too fearful to use.

Here’s a checklist to follow to help you get over your fear of the next bear market.

1. Know yourself

Emotions are the biggest challenge when a bear market hits. After spending years scrimping and saving to find money to invest and watching it grow slowly but steadily, it’s painful to see stock market declines wipe out a significant chunk of your portfolio. Even for seasoned investors, the kneejerk reaction is often to want to put those losses to an end quickly and sell.

The problem, though, is that for every downward move that actually turns into a bear market, there are dozens of times that the market reverses course and climbs higher. Selling after the initial stage of a brief panic and waiting to buy back your stocks after it runs its course will usually force you to pay more, eating into your long-term returns.

Building your confidence is essential in controlling your emotions as an investor, and the best confidence builder is to look at history. Even after the worst bear markets, stocks have always recovered and moved to new record levels. Recently, those recoveries have been surprisingly quick, often coming within just a few years. It’s never easy to keep that in mind in the middle of a panic, but it’s a fact you can use as the cornerstone of your long-term investing strategy to give you the confidence to stay the course.

2. Find the right risk level for your portfolio

It’s easy to stay fully and aggressively invested when stocks are moving higher. But if you foresee that your current level of market exposure will cause you to panic, the time to take action is before the bear market strikes.

That doesn’t mean selling all of your stocks, but it could mean reducing your stock allocations in order to cushion any potential blow. After a long run-up, rebalancing your portfolio is actually a good idea to keep you from unknowingly becoming overexposed to a future bear market.

3. Make a list and check it twice

With the holiday season right around the corner, wish lists are on people’s minds. That makes it a good time to make a stock wish list as well, because it can serve as a great tool when a bear market occurs.

Many investors have missed out on what would have been extremely successful investments over the past several years because the stocks they like always seemed too expensive. If you like a stock’s prospects but are convinced that its current valuation is just too high, put it on your wish list, along with a price at which you’d be comfortable buying shares. Then, if a bear market pushes the prices of the stocks you like lower, you’ll be ready to make investments that you’re comfortable holding for the long run. This can actually make you look forward to bear markets and the mouth-watering investment opportunities they can offer.

4. Be ready to stick with your investing plan

Many successful investors make investing automatic by having fixed amounts taken from their paychecks or bank accounts and sent to their brokerage or mutual fund accounts. Even in the midst of a bear market, that strategy can work exceptionally well.

After the financial crisis and bear market of 2008-09, the Employee Benefit Research Institute did a study of how typical Americans fared with their retirement plan accounts at work. The study found that the average 401(k) account balance plunged by more than 25% during 2008, reflecting stock ownership in most plans. But those who kept participating consistently through 401(k) contributions reaped the rewards of the recovery, as the median balance rose at an impressive 16% annual pace over the four years following the bear market low.

The reason why sticking with a plan is so important is that it lets you invest at low prices, allowing your money to go further by buying more shares. When stocks recover, you’ll own more shares and earn particularly strong returns on the investments you made at or near market lows. Capitalizing on those opportunities will have a definite positive impact on your long-term returns — as long as you have the discipline to pull the trigger when the time comes.

Have no fear

You can’t avoid bear markets, but you can plan for them. Having a strategy in place and ready to go for when the next bear market hits will help you sleep better at night — especially when you consider the possibility that you’ll be able to add some incredible stocks to your portfolio at prices that seem almost ridiculously low right now.

source: fool.com

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