How worried should you be while investing during a bear market?

“The true investment challenge is to perform well in difficult times.” Seth Klarman

Most investors hate bear market. No one likes to see their portfolio value drops during a bear market. But the truth is during wealth accumulation phase of your life, bear market might be a friend rather than a foe.

How worried should you be while investing during a bear market? Hear me right, you shouldn’t be worried at all! You might be surprised to find out a few years of market downturn might work wonder in your portfolio value.

In fact, you should be hoping the market to fall because you get to buy more on falling prices. It sounds insane but I was celebrating during the past few weeks because I managed to buy more ETFs with the same money I spent a few months ago.

A Real Example

Andrew Hallam in his latest book, ‘Balance’ illustrated two interesting investing scenarios you face as an investor every day. If you are given a chance as a long term investor, which scenario do you prefer?

In Scenario 1, the stock market soars for three straight years and over the next twenty years, it gains a compound annual return of 9.75 percent. OR,

In Scenario 2, the stock market slumps for three straight years and over the next twenty years, it gains a compound annual return of 5.94 percent.

Which one is a better scenario?

Most investors will go for scenario 1. Seeing your portfolio rises for the first three years is always a more rewarding investing journey, unfortunately, for a long term investor, scenario 2 is a better option.

Scenario 1 shows the S&P 500 index actual twenty-year returns from Jan 1, 1995 to December 31, 2014. Scenario 2 represents the actual twenty-year returns of the S&P 500 from Jan 1, 2000 to December 31, 2019. If you had USD 50,000 in a portfolio of low cost index funds initially and had invested an additional USD 2000 a month in to the S&P 500 in these two periods, you money would have grown to USD1,443,726 in scenario 1 and USD1,544,560 in scenario 2!

Yes, you would have done it better in term of portfolio value by experiencing three huge calender year losses early in your investment journey.

Don’t time the market

So at the end of the day, never try to time the market. Just hold on to your portfolio. And of course build up its value by cost averaging.

Timing the market is just a circus trick used by financial news to attract attention. Don’t fall prey to the trap. Ignore the noise and just stay the course. Hold on to your principal and buy your ETFs according to your asset allocation monthly.

It is OK that the market declines because it will happen some days, if not today, it might be next week, next month or a few years from now. A very important fact to remember is, the market will eventually go up again and inches higher in the long run.

Therefore, don’t be too carried away from short term volatility, if you look back at this moment 10 years from now, you would realize the best time to invest is always this day!

Conclusion

We are always facing uncertain times in this world. No one has the crystal ball to predict the future. As long as you stick to a low cost broad index fund, you are perfectly fine even though investing during a bear market.

Never try to beat the market, it is an extremely difficult thing to do consistently year after year. By investing in broad, low cost index funds or ETFs, you should feel comfortable investing during market corrections or crashes.

If you are still in your wealth accumulation phase, market downturn for a few years might help you to achieve your retirement number earlier.

Therefore it is understandable why William Bernstein says, “Young people should pray for a long, awful market.”