Low interest rates cause higher valuations. When savings accounts are yielding near 0%, the stock market looks like a comparatively favorable investment. This increases demand, and the price-to-earnings multiple of the market. The Federal Reserve is signaling a rate hike, possibly in December of 2015. This could cause market values to fall, and the SP 500’s price-to-earnings ratio to fall.
In addition to potentially higher interest rates, the global economy is looking increasingly fragile. Japan, Europe, and the U.S. carry high levels of debt. Greece and Puerto Rico are on the verge of defaulting. China is propping up its struggling stock market with central bank funded purchases.
There’s no question there will be another bear market. The only question is when… It could be a week from now, a month, or 3 years.
The average time between recessions is around 100 months. The last recession ended about 70 months ago… I believe it is likely (though not certain) that we enter into another bear market in the next 3 years, and possibly much sooner.
Whenever the next bear market occurs, now is the time to psychologically prepare yourself for it.
The Mindset Needed To Beat Bear Markets
When the market falls, things get ugly in a hurry. You can see that from these 3 bear market stock charts from October of 2007 through March of 2009.
Here’s the S&P 500 (SPY)
And emerging markets (VWO)
And small cap stocks (VBR)
When markets fall, it is important to remember that stock price movements are not your enemy. In fact, you can benefit from a recession in the stock market.
It takes a self-assured investor to not panic during bear markets. The average individual investor sells during bear markets and buys during bull markets. This is completely backward – and it’s the primary reason why individual investors tend to do so poorly in the stock market.
I hope by reading this you will take action.
When the next bear market hits – and hits your portfolio (and everyone else’s) hard, DO NOT SELL.
Instead, either hold your stocks (which is okay), or buy while bargains are available (which is much better).
If you can adjust your psychology to be excited for the bargains that bear markets provide – or at least be ambivalent about bear markets – you will greatly outperform your investing peers.
Gene Walden of All Star Stocks has excellent advice on what to do in bear markets:
“So what should you do in a bear market? If you’re a long-term investor you do roughly the same thing in a bear market that you would in a bull market. You buy right through it. You make a continuing series of small bets. You select good quality companies and continue to build a position in those companies.”
For me, the key to being excited about bear markets is to invest in high quality dividend growth stocks with a long history of increasing dividends. These are stocks that have proven themselves in both bull and bear markets.
