Understanding the Financial Market Life Cycle
Don’t panic! Bear Markets Are a Part of the Market Cycle as an Investor
After reaching record highs in January and closing the first quarter of 2022 at more than 20%, the S&P 500 as well as the NASDAQ plunged into bearish territory. This tumble has brought renewed attention to an age-old query: Are we in bear market? What does that mean for individual investors?
A drop of 20% in an index security or security is known as a bear market.
Some bear market are temporary, such as what we experienced with COVID-19 lockdown 2020, but others can last longer, as we saw during the Great Recession.
Investors are trying decide whether the current six-month slump in security prices is temporary or permanent. Despite this, it serves as a reminder to investors that stock markets don’t always go up in perpetuity. Bear markets can provide new opportunities.
The first half of 2022 has seen investors face a lot of negative news.
To create a sound investment plan, investors need to be concerned about supply chain issues, labor shortages. There are also spikes of rent and home prices.
Nobody can see the future. Therefore, it is not important that investors have the ability to forecast the future. Instead, focus on how we will respond to market turmoil and how to build our portfolios.
The Economic and Financial Markets Cycle
Behavioral finance experts say that investors are often influenced by emotions and end up making decisions that are not in line with their long-term goals.
Investors can be tempted to sell low and buy high when markets shift. Social media is full of debate about whether we are currently in a depression or not. The fact that financial markets already price this economic contraction in fixed income securities and equities is not surprising. It is not clear how long these headwinds are likely to persist.
Investors have easier access to key information about the economy & financial markets
Investors now have more information about the economy than ever before. You can also trade easily with many financial technology “apps”, which provide easy access and control over trading platforms. Investors are more likely than ever to react positively or negatively to any changes in the market.
Many of today’s investors have experienced nearly 13 years worth of market growth. Before our economy went into recession, they may have felt invincible buying stocks or trading options.
Everyone may have thought that every investment was a winner. Many people were making good money. But the extended market cycle and historically unprecedented fiscal-monetary policy stimulus during COVID lockdown created false expectations. People believed that the good times will continue for the foreseeable future.
Unfortunately, overconfident investors bought high as the market crested.
Wall Street has a common saying: “Don’t try to fight the Fed.” During the COVID-19 epidemic, unprecedented fiscal-monetary policies created an important tailwind for most investment.
Congress passed laws to provide money for American consumers and companies. The Federal Reserve offered flexible policies that allowed cash to be pumped into the economy in addition to stimulus money being distributed by the federal government.
These policies extended bull markets through the pandemic’s early days and many investors made great returns.
But “Don’t Fight The Fed,” works in both direction. First, the Federal Reserve has taken a restrictive stance to curb inflation and is now aggressively increasing interest rates.
As of today, inflation has remained at its highest level in over 30 years. Thus, the Fed is likely not to stop using all its weapons to combat inflation.
Due to the dramatic pullback in equity in the first-half, in particular in large-cap technology stocks, fear is driving retail investors to sell. This can lock in their losses, and reduce their ability to grow over the long term.
A Normal Part of Ebb And Flow in the Market Cycle
After a bull market period that lasted for many years, investors find it hard to see how the market’s recent declines from historic highs are part of the market cycles. Stocks will eventually have to go up, as there is no market that goes up forever.
It is difficult to predict what will happen in the markets every day. You don’t need to panic, so long as your portfolio is properly diversified according to your individual investment goals. Instead, you can relax, take your time, and let nature do the rest.
Diversify your portfolio and invest according to your schedule
Recessions are also part of the human life cycle. There’s no need for panic as long you keep your portfolio diversified and invest according to your timeline.
It can be easy to invest in different goals. It’s important that you align your investment allocations with each goal’s timelines. You should also be focused on the long term. Diversify your portfolio and avoid products that have high fees.
You should consider your time frame for saving money and then invest according to it. Consider, for example, that if you are several years away from retirement your retirement allocation will likely be close at 100% in equities.
Your money should be well-diversified so you can leave it behind.
You will invest your money in cash and cash alternatives like CDs. Fixed-income securities are best for long-term goals.
As you grow your goal investment horizons, equities will become more prominent and important in your portfolio. Be aware that if your investments are sold to support long-term goals you are effectively locking yourself in for the loss.
Diversification is the Key to Any Long-Term Investment Strategy
You should not have all your money invested in one security. Instead, you should allocate your investments to each goal that you are saving towards. You may get rich investing all your money into one stock or option or cryptocurrency. While everyone boasts about how much they make from one trade on social media, however, many people lose their entire wealth.
Investors need to be able to distinguish between investing, having a solid strategy and gambling.
Do you know the details of the investment that you are considering? And why is it going up or down? While many media outlets tend to focus on short-term trades, investors should realize that speculation is not investing.
Long-term investing is easy and should not be difficult to understand
Long-term investing shouldn’t be stressful. But the difficult part about developing a long-term investment plan is sticking with that plan even in turbulent market environments.
We as investors should feel satisfied about putting our money into work.
Avoid getting rich quick schemes and short-term speculation. Jack Bogle once said that investors win and speculators are losers.