How Millionaires Invest During a Bear Market
Hiring a millionaire can help you avoid emotional decisions while waiting for stock market problems.
A bear market - indicated by a 20% or more decline in stock prices - can be easier to survive if you are properly diversified and in the long run. Warren Buffett, CEO of Berkshire Hathaway (ticker: BRK.A, BRK.B), is an excellent example of how to invest like a millionaire (or a billionaire in his case) in all market seasons, recessionary periods or periods of increased volatility. Buffett has combined annual capital of more than 20% for the past 50 years.
"Investors often question their investment strategy or planning," said Monica Sipes, partner and senior wealth advisor at Exencial Wealth Advisors in Frisco, Texas. "They understand that math works in their favor in a bear market, but it can be emotionally demanding."
[Read: How To Invest In A Bear Market As A Beginner.]
Developing some coping mechanisms that mimic how millionaires invest in a bear market can help you maintain stability and consistency in your investment strategy.
Here are some of the best tips to increase wealth like a millionaire:
- Resist the urge to run.
- Think big, act small.
- Automate your investments.
- Know what you own.
- Limit your losses.
- Keep an eye on the bear markets.
Resist the urge to run
At the first sign of a bear market, you might be tempted to sell stocks to minimize losses. Incidentally, this approach is not intuitive for the way of thinking of millionaires.
"Investors need to be able to hold their investments during an economic downturn or bear market," said Marc Doss, regional chief investment officer at Wells Fargo Private Bank in San Diego. "Some investors sell during a downturn and do not participate in the recovery phase."
According to Doss, one of the keys to avoiding a forced sellout is the availability of cash that you can rely on when the economic outlook is uncertain.
"Investors can use their money instead of using their long-term investments during a bear market," he adds.
Think big, act small
During a bear market, investing like a millionaire means focusing on your goals while strategically dealing with your actions.
"Millionaire investors will think ahead in five or ten years," said Clark Kendall, CEO of Kendall Capital in Rockville, Maryland.
This includes considering what the economy and the markets will look like, how consumers will spend money and what the interest rate forecast could look like. They then use that dollar-and-cent thinking to shape the measures they take in the short term.
"They control risk by making a series of small decisions and knowing that every decision can be a wrong decision," says Kendall. "But a number of well-thought-out little decisions will usually only surpass one big decision."
Many millionaire investors rely on a slow and steady approach to building the portfolio, says Ryan Shuchman, partner at Cornerstone Financial Services in Southfield, Michigan. "There are only a few with substantial assets that come from the 'big profits' in the market."
The lesson here, says Shuchman, is to avoid "all-in" buying or selling since the chances of this strategy paying off are rather slim.
Automate your investments
Automating your investments can do two things for you.
First, it ensures that you consistently use the options for averaging customs costs and compound interest over time. Second, it can help you avoid the pitfalls of trying to time the market.
The time a person spends in the market is more important than the timing in the market, says Tim Quillin, Chartered Financial Analyst and Partner at Aptus Financial in Little Rock, Arkansas.
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When investors take their money out of the market, they have to be right twice: when they sell their shares and when they invest in the market again.
"The saddest missteps in investing are when people try to outsmart the market by typically selling stocks in times of uncertainty like late 2008 or early 2009 or even December 2018," says Quillin.
Know what you own
Knowing what you own is good advice to invest in any type of market like a millionaire. Understanding the concept of what you bought and why you bought it is a principle that Gerald Loeb, founding partner of the brokerage firm E.F. Hutton & Co., can be attributed.
"He was probably the first real speculator in growth stocks because he always analyzed the financial data of a company he bought," said C.J. Brott, founder of Capital Ideas in Dallas. "Loeb then worked out one reason for owning the stock. The reason you own it became what he called 'the prevailing reason' for owning it."
Loeb also pursued the strategy of selling a stock when the reason for the purchase no longer applied. He was able to sell without hesitation, and this attitude kept him from "constantly rationalizing what could be a losing investment and sticking to it to be balanced," says Brott. "It also helped him sell his losers and hold on to the winners as long as the reason was intact."
Limit your losses
Realigning your portfolio can help minimize losses. This is a critical step, says Peter Roselle, a treasure coast, Florida-based stock and options trader.
Roselle is a fan of financial advisors who focus on short sales based on a large amount of research. This is shown, for example, by David Einhorn, President of the New York-based fund management company Greenlight Capital, and Jim Chanos, President of Kynikos Associates.
"You should have checked your asset allocation when stock prices rose and adjusted - the same thing happens if they fall," said Roselle. "For most people, this means increasing the equity portion of the portfolio, as falling stock prices cause fixed income securities to become a larger part of your portfolio."
Keeping losses down is a proven rule to win speculators, says Brott. The resource assistant Richard Dennis is a good example. It is reported to have grown from $ 1,600 to $ 200 million in 10 years.
"To prove that everyone can learn to trade, he founded the turtle dealers and taught a group of newbies to successfully convert small sums into millions of dollars by following the rules," said Brott.
Keep an eye on the bear markets
While bear markets can cause fear, it's important to keep an eye on things.
First and foremost, bear markets don't last forever. And being scared can hinder your investment goals.
"Panic sales on a bear market or at the end of a bear market often result in greater damage to your investment portfolio in the long term," said Drue Kampmann, co-founder of True Financial Partners in Bettendorf, Iowa.
[Read: 3 Ways To Invest New Money In A Bear Market.]
According to Kampmann, millionaire investors often have the advantage of experience on their side so that they can see the bear markets in a different light. As a result, downturns are seen as a way to buy assets at a discount that can pay off later when stock prices start to rise.
You can take the same approach to investing in millionaires by looking for entry points instead of preparing to exit.
"Let the emotions aside and look at a bear market from an opportunistic perspective versus a fear," says Kampmann. "Historically, the best days on the stock market follow some of the worst days on the stock market."
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