The Nasdaq Composite And Contact 2000 I’ve already entered deep into a bear market – a drop of 20% or more from the previous high. After this week’s heavy selling, the Standard & Poor’s 500 It is now a few percentage points away from a bear market as well.
Walt DisneyAnd AmazonAnd ID padsAnd StarbucksAnd Adobe They are just a few of the names on the long list of companies whose stock prices are down 40% or more from all-time highs. Other growth stocks that were once loved like Shopify (store 13.85%) And Netflix It has seen its share price drop more than 75% from its peak.
Bear markets can create life-changing wealth by giving investors buying opportunities, but that doesn’t mean it’s time to plunge into the abyss of this situation without a plan. Here are three mistakes worth avoiding during a bear market.
Investing in companies you don’t understand
Perhaps the easiest way to lose money in a bear market is to invest in a business you don’t understand. Several companies have seen their ratings swell to nosebleed levels over the past few years. Thrill-seeking investors flock to looking for high-risk, high-return stocks in these names, many without understanding the underlying business. The result was huge swings to the upside followed by massive losses on the downside.
During a bear market, things become true very quickly. An investor who monitors his portfolio goes from forest green to crimson red in a matter of months without knowing why he is prone to getting impatient and seeking exits. If you don’t understand the companies you own, it’s hard to know what decision to make and when.
Bear markets are putting fundamentals to the test. Companies with good cash flows and good balance sheets tend to survive bear markets and grow over time. The ones you don’t tend to get rid of.
Fixing all-time highs as a fair price or a price the stock will reach again
Another big mistake investors can make is thinking that the highest ever price for a stock is a fair price or a price the stock will return to one day. After all, if the stock fell 80% from its high and went back to that high, that would be a 500% return. Sorry to say, but many stocks will never reach all-time highs in 2020 and 2021. Or if they do, it could take a long time.
As mentioned above, Shopify stock is down more than 80% from its all-time high. Despite attractive fundamentals, strong growth, a well-run business, and the tailwind of the e-commerce industry, Shopify stocks still aren’t cheap by any means. The company has a much more attractive risk/return profile now that the stock price has fallen so much. But that doesn’t mean Shopify has to have a market capitalization of more than $200 billion (which it did at its peak) in order to prove that it can maintain a high growth rate and achieve consistent gross margin.
However, just as many growth stocks have swung away from the upside, others have swung a lot to the downside. Even though Shopify is expensive, the risks are starting to look less daunting relative to the reward. Shopify has its problems, but at the end of the day, it’s an incredibly well-run company with a lot of potential for growth. Perhaps the worst part about Shopify is its rating. With this issue being so much less relevant now, it seems like a good time for investors to start thinking about stocks like Shopify.
However, getting into such a stock assuming it will return more than 400% in the short term is a wrong approach. Instead, it’s best to treat declining growth stocks with quality fundamentals like companies you believe in and feel comfortable owning over at least a five-year time frame.
Gambling on speculative shares
Another big mistake is trying to catch a falling knife on a company that is in a big drop just because the stock is going down so much. This mistake is a combination of the first and second mistake and a common decision that investors make in a bear market. The temptation to see a stock that has been sold and to try to buy it when it’s going down without knowing why can lead to painful losses. The proportions may shock you.
let’s choose Rocco (ROKU 11.82%) And Robinhood Markets (Hood 24.88%). On January 1, both companies were down 50% to 75% from all-time highs. But since then, each stock has fallen an additional 50% to 65%.
The math seems confusing at first, but it makes more sense with real numbers. Suppose an investor buys a stock for $300 a share in 2021, then opens 2022 at $100 a share. It would be a 67% loss. Then, four months later, the stock was $50 per share. The pullback from the top is 83%. But even an investor who bought the stock down 67% at the start of the year was already down 50%.
This exact scenario has emerged with many growth stocks falling from grace. Granted, that doesn’t mean they’re all bad. In fact, some now look like extraordinary purchases. Just saying that because the stock has fallen so dramatically doesn’t mean it can’t alarm investors trying to buy the drop.
Let time be your best friend
Instead of trying to be a hero and swinging around fences during a bear market, the best course of action could be to simply save what you can, average dollar cost in the stock market (especially when stocks are up for sale), and stick to quality companies with Strong foundations and the best chance to persevere through these bear markets and futures. This plan may not present the most positive aspect, but it certainly does offer a risk/return profile that makes sense for most investors.