Investing in a bear market can be a challenge, especially when it comes to your retirement plan. As humans, we often follow two intellectual thought patterns: avoid losses and follow the crowd. Including these stocks in your retirement plan could prove detrimental to your long-term investment goals. Let’s identify these patterns, then offer alternatives to help propel your success.
Avoiding losses is known as loss aversion. This happens when we are more concerned with downward price movements in the value of investments than upward movement. An example would be when you quickly sell a position in your portfolio based on the overall market and not the fundamentals of that particular position. This pattern of thinking causes investors to panic and sell a falling investment when they think it might head further south in the near term.
Following the crowd is also known as the herd mentality. It describes how we might be influenced by the masses to act on an emotional rather than a rational basis. Let’s say you decide where to dine. You see a crowded restaurant and an empty restaurant. Research has shown that we are more likely to choose the crowded restaurant assuming it is better because it is more crowded.
Now let’s talk about useful tools to manage these patterns and take advantage of downside volatility market opportunities.
Stay disciplined
Your retirement plan provides you with the perfect vehicle to continue investing while the market is down. This structure maintains the steady pace of investment purchases. Depending on your time horizon to retirement, you could change your allocation and shift to a higher percentage of stocks and invest more at lower prices. This could ultimately be a huge advantage when you reach retirement.
Avoid the crowd
Another downside built into our financial behaviors is following the crowd or herd mentality. This market reaction would go against the buy and hold advice. As the market goes down, more retail and institutional investors start selling. Thinking that we must do the same to avoid more losses, we sell at the wrong time. Then the market inevitably turns upside, and we are challenged to buy back on the upslope. Staying focused on the long term and not being swayed by others will benefit your retirement investments and your long-term bottom line.
Rebalancing
The other strategy to implement in your retirement plan during a bear market is rebalancing. If you’ve followed the tips for diversifying your portfolio, then you’ll have the opportunity to bring your asset allocation back to your long-term stocks and bonds percentages. Some pension plans even provide for regular rebalancing of your portfolio. But if not, then you should take the time to review and rebalance. This technique will help you sell positions at a higher value and buy “sell” positions.
Michel Paregian
Following these strategies could help you achieve your retirement goals. So when the market next drops, it’s worth remembering to stay disciplined and keep investing, to be contrarian and avoid following the crowd, and to make sure to rebalance your portfolio. depending on your risk tolerance.
About the Author – Michael G. Paregian, CFP®, CTFA
Michael G. Paregian, CFP®, CTFA, Senior Wealth Planning Strategist for Bryn Mawr Wealth Management. Michael has over 26 years of financial planning and investment experience. Michael graduated from the University of Maryland and is a Certified Financial Planner and Certified Fiduciary and Fiduciary Advisor.