Metaplatforms (FULL BOARD 3.86%) shares rose more than 17% on Thursday, after Amazon (AMZN 5.73%) shares fell more than 12% in after-hours trading. When such large companies make mega moves up and down, it can be a sign that the market is volatile. and given the Nasdaq Composite has plunged into a bear market in a matter of months, it’s clear that the 2022 stock market looks a lot different than the breakneck year we had in 2021. A bear market is defined as a draw of at least 20% from a high historical, while a correction, that the S&P 500 is currently, it is a reduction of at least 10% from an all-time high.
However, bear markets are not inherently bad. And with the right temperament and patience, they can even lead to life-changing wealth. Here are three timeless investing lessons from the 2022 Nasdaq bear market that you can take with you to become a better investor.
1. It is a staircase that goes up and an elevator that goes down.
There is an old saying that the stock market is a ladder to go up and an elevator to go down. We are seeing this pattern unfold before our very eyes.
Bull markets are usually slow and steady and last for several years, while bear marks are sharp and fast and tend to last only one or a few years. At least that’s what history tells us. And that is certainly what has happened since the financial crisis. There has been a 12-year bull market more or less uninterrupted since the financial crisis. But included in that bull market have been a handful of bear markets, such as the fall 2018 bear market, the spring 2020 bear market, and the bear market we are currently in.
Regardless, however, the S&P 500 has produced a return of 375% (excluding dividends) since January 1, 2009, while the Nasdaq Composite has produced a return of over 700% (excluding dividends). taking into account dividends).
The average annual gain of the S&P 500 between 1950 and 2021 was 12.36%. But the standard deviation for that period was 16.04 percentage points. That means that about one in three years produces an annual return of less than -5.91% or more than 26.17%.
It’s also worth mentioning that there have been 18 low years and 53 high years since 1950. But the average return during a low year is -11.4%. However, that data is somewhat misleading given the unlikelihood of bear markets correlating with calendar years. For example, in 2018, the S&P 500 was up nearly 10% year-to-date (YTD) in early October 2018, down as much as 12% year-to-date on Christmas Eve (a change of 22 percentage points in less than three months). ), but then ended the year down just 6%.
2. Reviews matter
Probably one of the most contentious debates in investing is valuation. At one end of the spectrum, you have investors like Warren Buffett who preach value investing and only pay reasonable amounts for companies based on their earnings, free cash flow, etc. Then, at the other extreme, you have investors like Cathie Wood who argue that innovative companies that change the paradigms of their industries have so much potential that valuation should be an afterthought.
The 2022 bear market has taught us that while companies may have a lot of potential, there is great uncertainty as to whether they will be able to deliver on high expectations. Uncertainty can come in the form of dodgy management, as we have seen through the spectacular collapse of Health Teladoc (TDOC 9.45%) shares, which are down more than 90% from their all-time high. It may also come in the form of increased competition, which we’ve seen in the fintech space as legacy financial services companies open their pockets on investment, which has tightened the edge companies like. Robin Hood, sofiY Upstart they were thought to have in abundance.
The best approach for most investors is to find a happy medium between value and growth using as many known variables as possible and avoiding unknown ones. In this sense, that probably means sticking primarily with established companies with positive free cash flow and growth potential. These are the types of companies you’ll want to have on your side if the market crashes.
3. Invest in companies that you understand and that fit your personal risk tolerance
The biggest mistake an investor can make is not selling too early or buying something too high. It’s investing in companies you don’t understand and that don’t fit your personal risk tolerance. Because if you do that, then you won’t know why a stock can be up 400% one year and then down 90% the next. Or why a dividend-heavy stock can barely move as the market soars and then barely drop when the market stalls.
Aligning your personal risk preferences with companies you understand and believe in is the best way to avoid the psychological torment that can come when a bear market is putting pressure on good and bad companies alike and you don’t know how to react. By sticking to a process, you have the best chance of weathering market volatility and letting the power of compounding work in your favor over the long haul.
Embrace Lifelong Learning
Many investors who are new to the stock market have never endured a multi-year bear market. The bear market at the end of 2018 only lasted a few months. Same thing with the 2020 bear market. In fact, there hasn’t been a bear market that lasted more than a year since 2008. By taking a long-term perspective while also using the bear market as a learning experience, you can use this period of stock market volatility to sharpen your skills and become a better investor. If done correctly, this approach could pay lifetime dividends that far outweigh any pain your portfolio is currently experiencing.