“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” — Sir John Templeton, fund manager and philanthropist
The stock market, measured by the S&P500 the index of America’s largest companies, recently fell 20.5% from its 52-week high. This qualifies as a bear market drop (a drop between 10% and 20% is usually called a correction). And that reflects a lot of pessimism due to many recent factors such as supply chain disruptions, inflation spikes and rising interest rates.
The coming year could welcome a bull market (although this is far from guaranteed). Here’s an overview of how to prepare for it.
Image source: Getty Images.
A bit of historical context
Some bear markets are brief, while others can last for years. the medium length is about a year, more or less. The market’s last descent began in early 2022, but only entered bearish territory in mid-June, about six months ago.
How to prepare for a bull market
It is entirely possible that the market will change direction in 2023, so you might want to be prepared to take advantage of it as much as possible. Here are some ways to do it:
Focus on stocks
For starters, be sure to focus most, if not all, of your long-term dollars on stocks. Here are the average returns for various asset classes between 1802 and 2021, according to Wharton Business School professor Jeremy Siegel:
|
Asset class |
Nominal annualized return |
|---|---|
|
Shares |
8.4% |
|
Obligations |
5% |
|
Goods of treasure |
4% |
|
Gold |
2.1% |
|
American dollars |
1.4% |
Source: Stocks for the long term, by Jeremy Siegel.
Equities also reign supreme over shorter periods. For example, Siegel found that between 1946 and 2021, stocks rose at an average annual rate of 11.3%, compared to 5.8% for long-term government bonds.
Jump on the bargains
With the overall market down sharply, many stocks linked to very strong companies are also down – and in some cases, down a plot. These can be great opportunities to buy stocks for less than if you had bought them a few months ago. Do your research first and only invest when you are confident.
If you are confident enough, you could invest in a lump sum. If you are less confident, you could gradually build a position in various stocks, buying some of the stocks you want now, later, and again later through the strategy of average purchase in dollars.
Consider index funds
Not everyone wants to study stocks and make buy and sell decisions, and those people should just opt for low cost index fundswhich can also increase wealth powerfully.
Avoid common mistakes
Cool off on common investing mistakes to avoid them. For example, do not fall into penny stocks, do not engage in short-term trading, do not invest on margin (i.e. with borrowed money) and do not invest in what you do not understand.
Don’t try to time the market either, or you could find yourself on the sidelines as it recovers. When you find good investments at good prices, it’s often better to just buy.
Plan to last for many years and don’t keep too many eggs in one basket
Prepare to be patient. If you want a portfolio with many great long-term returns, you’ll have to hang in there for many years, both ups and downs. Our Motley Fool’s Investment Philosophy recommends buying at least 25 stocks and holding them for at least five years – minimum. Aim to hold great stocks for decades while regularly checking their progress, business health, and potential. By owning at least 25 different stocks, you’ll avoid having too many in an industry and you’ll be more likely to have some of tomorrow’s miracle stocks.
Reinvest those dividends
Invest in dividend-paying stocks is smart, and they can be especially attractive before a bull market begins. Indeed, as the price of a stock falls, its dividend yield increases. So there are extra-fat dividends there.
Even better, healthy and growing dividend payers tend to increase their payouts over time. Over the years, you’ll see more and more money flow into your investment accounts from dividends. It might be tempting to cash it in, but reinvest it in more stocks. Your broker can do this automatically for you, or you can simply wait until you have a certain amount and then buy shares of the most promising stocks you know of.
Bear markets can be stressful because your portfolio is worth much less than it was not so long ago. But they also present excellent buying opportunities. So do your research, find great stocks and invest for the long term. If you want to make it easier, stick with one or two low-fee index funds. It is also an excellent strategy.
10 stocks we like better than Walmart
When our award-winning team of analysts have investment advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They have just revealed what they believe to be the ten best stocks for investors to buy now…and Walmart wasn’t one of them! That’s right – they think these 10 stocks are even better buys.
Portfolio Advisor Returns as of December 1, 2022
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
0 Comments