5 Bear Market Mistakes to Avoid

by | Apr 28, 2022

Bear markets can make it difficult for investors to stay the course. Stock market volatility and negative headlines give the impression that you should be doing something and poor investor behavior may begin to emerge. 

Stock market investing can be emotionally challenging in a bear market, especially when combined with a major world crisis (i.e. COVID-19 Pandemic, Russia/Ukraine conflict, etc.). That’s precisely why successful investing is not only a result of which good decisions you make, but also the poor decisions you avoid.

What if you could tilt the scales in your favor and make it that much easier to make those good decisions? What if you could comfortably navigate the sometimes-turbulent waters that arise from the uncertainties of the stock market? Couldn’t that lead to better long-term investing outcomes? Absolutely, but how?

In this article, we’ll cover 5 bear market mistakes and how to avoid them.


1.  Believing a Bear Market Means You Need to “Do Something”

When the stock market declines, and investors subsequently see their account values decline, it can feel nauseating. The steeper the decline, the more difficult it can be to stomach. And, it feels almost irresponsible to simply sit there and watch, doing nothing. The urgency is that you should be “doing something,” and that “something” usually means selling.

But, there is a chance that doing nothing is precisely what investors should be doing during a bear market, especially if your portfolio was properly allocated prior to the crisis.

What does properly allocated mean? I believe it means invested in a portfolio of low-cost, diversified funds, and your allocation has been created with your unique financial situation in mind. If this describes your investments, the presence of a crisis is not likely to suggest major changes.

Another consideration is that selling or making changes during a bear market could lead to permanent losses on the positions you sell, which is obviously what you’d like to avoid. After all, the goal is to buy when prices are low, not sell when prices are low.

Now, if the “something” you plan to do during a bear market includes buying stocks or correcting a previously improperly allocated portfolio, those could be prudent actions to take (but speak with an investment adviser before making any investment decisions).


2.  Consuming Too Much News

While possibly a good piece of advice for your life in general, this tip can also drastically reduce your financial stress during a bear market. First and foremost, news outlets have one goal in mind: drive ratings. What’s their go-to strategy? Fear.

Fear is the most powerful motivator. It’s the one thing that will make us stay glued to our TVs and phones to see what the latest update is with the (insert crisis).

It’s so important to understand the motives of media companies and once you do, you’ll understand that although some reporting may come across as advice, they are not your advisors. They certainly are not fiduciaries, meaning they are not held to any sort of “best interest” standard. They don’t care if you retire on time, lose money, or run out of money.

Because of this, the tendency is for media outlets to exaggerate headlines, often making things seem worse than they are. Do they care if you make poor investment decisions and lose money as a result of their exaggerations? Of course not.

For example, I recently saw a headline from MarketWatch that read “U.S. stock futures plunge as investors weigh impact of latest Russia sanctions.” The sub-title revealed that the Dow futures were down about 400 points at that time (about a 1.17% decline), far short of what I would call a plunge. But, I imagine that some investors may have seen a headline like that and thought they should sell before losing any more money, ultimately hurting themselves in the long-run.

So, what should you do? Turn off the TV. Put down your phone or at least stop reading the headlines on your stock app. Better yet, read more articles like this that will reinforce the behaviors that will lead to better outcomes.


3.  Checking Your Accounts Just for the Balance

When you are monitoring your accounts in a bear market, or in any time, the first thing you’ll likely to note of is the balance. I get it. It makes sense. But, you can see why this might be counter-productive during a down market.

We all sort of keep an internal accounting of milestones for our portfolio and it’s a near guarantee that during a crisis, you’re going to see a balance lower than your highest milestone balance (otherwise it wouldn’t be a market downturn, right?). However, checking your balance is not that important during a crisis. There are several other things you should monitor, and some of them are good to do during any time period.

The first big one is allocation. Are you diversified? Do you have a nice mix between large cap, small cap, domestic, and international securities? How about bonds? Are those diversified as well? Monitoring your asset allocation would help determine if a rebalance is needed (meaning you may want to sell your top performers and buy your lower performers).

Other good things to check on when you view your accounts include verifying fee transactions, beneficiaries, and making sure you don’t see any other suspicious transactions.

Of course, it is going to be nearly impossible to avoid seeing the balance if you’re checking these other things, but it would be advised to not put too much “stock” in what you see.


4.  Looking at Your Accounts Too Often

Let me clearly state that monitoring your accounts is not a bad thing. This tip assumes that you either have an advisor or you’re implementing a long-term, buy-and-hold type approach.

The problem arises when investors are logging in everyday (or more) to view their balances, even though making changes would go against their investment philosophy, or they’ve given over control of their investments to an advisor altogether.

Logging in to view your balance is just another activity that can perpetuate the “do something” narrative that investors should be trying to avoid. It will make you feel every bump in the road and will make the emotional roller coaster ride of investing in the market even more emotional.

However, you may wonder what is a good frequency to check or make changes to your account? Well, I doubt any advisor would require you to check your account on any frequency. And, as far as how often you should be rebalancing your accounts, many would say that 1-2 times per year is plenty. I can only imagine how much less stress investors would feel if they only checked their accounts 1-2 times per year.

So monitor your accounts, but consider doing it less often during a bear market.


5.  Improperly Evaluating Performance

Lastly, it can be easy to look at your investments during a bear market and think they’re bad investments because perhaps they show negative YTD returns, 1-year returns, 3-year returns, or even negative 5-year returns. But, measuring any security or group of securities at a bottoming point can be quite misleading.

Take the S&P 500, for example. The average annualized return of the S&P 500 index from its inception in 1926 through December 31, 2021, is 10.67%. But, there have been many 5-year periods where the S&P 500 returns were negative, including 2000-2004 and 2007-2011. Does this mean the S&P 500 is a bad investment?

Absolutely not. We just showed the average annualized return over a much longer period of time was 10.67%. This data simply suggests that stocks are better to be evaluated over long periods of time as they can be fairly unpredictable in the short run. Savings accounts and money markets, on the other hand, do not require the same amount of time for predictable results. That is why they are reliable short-term investments.

How long then should you give a portfolio of stocks or stock funds in order to fairly evaluate them? While there is no clear-cut answer, a good practice is to use no less than 10 years as a baseline. The more time that is given, the less variance there has been in average returns, according to historical data.

Also, instead of measuring from the top-down, or from your portfolio’s highest point to where it lands after a downturn, measure from the bottom-up, and remember the growth that has occurred over time. Keeping this in mind will provide an enormous amount of much-needed perspective during difficult market times.


Bottom Line on Bear Markets

Behavior is such a huge dictator of success and it’s often the hard times that separate successful investors from those that underperform. To help promote better behaviors in your own financial life, do yourself a few favors during the next bear market. Avoid the urge to do something or sell something. Turn off your TV and avoid the news. Check your accounts sparingly and avoid looking at the balance each day. And when you do check your accounts, monitor the right things and evaluate each investment according to its own time horizon.

Most of all, make sure you are invested properly and according to your own customized financial plan. If you do that, and focus on what is in your control, you’ll have a better chance of avoiding these crucial mistakes during the next bear market.


For more information or a review of your financial plan, contact us at 618-288-9505 or click below to schedule a free retirement analysis. 

Joe Allaria, CFP®

Joe Allaria, CFP®

Wealth Advisor | Partner

As featured in The Wall Street Journal, USAToday.com, CNBC.com, Nasdaq.com, and Yahoo Finance.

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