How New Investors Can Handle Their First Bear Market

Many investors who had started investing in the last two years are experiencing their first bear market. None of Gen Z’s preferred investment products (cryptocurrencies, NFTs, e-commerce IPOs, stocks) have been spared. These investors are too young to remember the defeat of 2008 and, seeing only outrageous valuations and returns, find it difficult to accept losses. All those who have derided simple, sensible, and cautious advice as old-fashioned are amazed at how quickly things can go wrong.

Overconfidence tends to blur risks. New investors made large sums of money in such a short time that they felt invincible and made speculative investments. The same overconfidence also makes people believe that their investment bets will recover and therefore they are considering buying more to average. Current prices may seem like reasonable value, but were these the right investments to choose in the first place? Many of these investment products such as cryptocurrencies, NFTs, e-commerce IPOs may not reach their highs since they were overvalued and unprofitable in the first place.

Some rookies are exiting the market hoping to re-enter their lows. It is impossible for anyone to know when a market will bottom out. Markets are unpredictable and could recover very quickly like in 2020 or take a long time like in 2009-11. Even during a bounce, investors are often slow to get back in, so long that one could have invested. For those investors unsettled by the current downtrend, it’s time to go back to the drawing board!

Start with the basics. Ask yourself why are you investing? What is the end use of the money you are investing? Once you figure this out, you’ll know where to allocate funds based on your investment horizon.

Where are you investing? Simply buying any stock is not going to grow your wealth. Make a plan based on your goals and stick to simple, boring investments that provide a decent average return over the long term. There is a wide variety of mutual funds that can be considered. It can be difficult to figure out which fund to invest in. An easy way is to refer to Mint20: a curated list of 20 schemes, chosen based on quantitative and qualitative parameters. Ditch Coins and Jpegs (NFTs) and cut your IPO losses.

Remember, the best things in life take time. The fastest way is not the best way. Investments take time to grow, and patience is what makes wealth grow (provided you choose the right investment!).

Investments should be made based on research and not based on advice and rumors on social media. Stop believing the stories being told about disruptive business, new age investing and the like. In the long run, stock prices move based on earnings, and all the stories that influencers put out are just stories that don’t turn out to be true. Leave stock picking to the professionals. Use your time to promote your profession or pursue your interests. That’s going to be more rewarding than spending time trading stocks. Investors also don’t realize the impact that constantly monitoring (or trading) their portfolio has on their mental health.

Every year, the best performing asset class changes. Gold, which topped out in 2019 and 2020, was at the bottom in 2021. No one really knows which investment or asset class will perform the best in 2022 or 2023 and beyond. It’s better to diversify your investments into stocks, bonds, and gold rather than focus on concentrated short-term allocations. The bear market experience can provide great learning opportunities. It teaches us to appreciate reality over narratives. It also teaches us how to take the right risks. Take this opportunity to make corrections. For example, instead of trading small-cap stocks, move into a small-cap fund or, if you want to reduce risk, a flexible-cap fund.

Bear markets can be painful, but markets end up being positive most of the time in the long run. The key is to not stop investing and have nerves of steel.

Mrin Agarwal is Founder and Director of Finsafe India

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