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Taking Advantage of Bear Markets: Tips for Young Investors

March 09, 2023

Bear markets are never fun. They are turbulent times in the market where countless people see
their equity positions reduce in value. However, if you are a younger investor, a bear market can
actually work to your advantage. If you started investing after 2008, you experienced one of the
longest and strongest bull markets in the history of the stock market. But the negative returns of
2022 for the S&P 500 and the NASDAQ likely came as a shock to many, especially those with
recency bias who were used to consistent gains. Nevertheless, bear markets offer valuable
opportunities to build discipline, resilience, and potentially increase your wealth in the long-term.
Here’s some reasons why bear markets may actually play to your advantage.

  1. Investing is not only about selecting the right investments, but also about managing your
    “investor psychology”. A bear market will test your discipline and commitment to your
    investing strategy. History shows that staying true to your long-term vision and trying to
    avoid panic selling will pay off in the end. There will be countless more bear markets in
    the future but keep in mind that the market has recovered from every one of them. By
    maintaining a long-term perspective, you'll be much better prepared for future market
    downturns. As a younger investor you likely have a long time horizon, so don’t let a bear
    market, which will be extremely short relative to your entire investing career, bother you
    too much. Instead, use it to help you build your mental fortitude and you will become a
    better investor from it!
  2. As a young investor, you likely employ dollar cost averaging, a strategy of investing a set
    amount systematically, such as with each paycheck. This approach allows you to take
    advantage of lower prices. You’ll be able to buy more shares with the same amount of
    funds, which in turn will increase your future growth potential when the market recovers.
    Dollar cost averaging also tends to help smooth out volatility in your portfolio by helping
    offset market downturns with the additional funds you are adding. No one knows when
    the bottom will occur, so dollar cost averaging ensures you capture the lower prices as
    best you can and helps take some of the emotion out of the equation.
  3. Bear markets also present opportunistic investment times. Companies you may have
    been interested in but felt were too expensive may now be trading at a discount. Or, if
    your portfolio is heavily concentrated in one sector, you can use this time to diversify and
    buy high-quality stocks in a different sector, now at a cheaper price. By using a bear
    market to help diversify the sectors in your portfolio, you will be helping against future
    downturns because different sectors behave differently in bear markets. Ensure that you
    capitalize on these lower prices and allow them to help shape your portfolio to position it
    to have the best probability of greater future returns.

It's important to remember that bear markets are never fun, but as a younger investor with
decades ahead of you, time is on your side! Rather than getting discouraged, take advantage of
market downturns to better your future self. With discipline, a long-term perspective, and
opportunistic investments, you can turn a bear market into a powerful tool for increasing your
future wealth.