2022 has been a challenging year for investing, with the longest bear market since 2008. The Fed seems serious about controlling inflation, and higher interest rates are seldom good for stock performance. When the market peaked at the end of 2021, many investors were eager to invest more. At that time, if you asked investors how they would react to a market decline, many indicated that they would take advantage of it by investing more. However, with the S&P down over 15%, and smaller stocks down a lot more, many investors are hesitant to invest.
One of the reasons for this disconnect is recency bias. When the market is going up, we tend to believe it will keep rising. Good news begets good news. When it is going down, we anticipate that it will continue to fall. A big part of this is the news flow. When markets decline, the news flow is usually bad. For example, this year, due to higher than anticipated inflation, the Fed started to raise interest rates. Then, Russia invaded Ukraine leading to even higher inflation and large market declines. It’s one thing to talk about remaining in the market or investing more if the market declines. It’s another thing to do it when it happens. Very few of my clients have come to me asking to invest more funds during the decline.
It’s always hard to predict when markets will rebound. It’s possible we have already seen the bottom of this bear market. It’s also possible we can see further declines. One thing I have written about before is an “all or nothing” mentality that many have when investing. Examples include:
- My position in xxx company has gone up a lot. Should I sell it all?
- The market is down and things seem bad. Should I go to all cash?
- I have funds to invest but it doesn’t seem like a good time to invest. It looks like the market will keep going down.
It’s impossible to predict short-term movements in stocks and markets, but there are some good ways to deal with recency bias and to improve your investing:
- Limit a given investment to a certain percentage of your total assets to limit potential losses. If it rises above that percentage, sell shares to bring it down to the target.
- In a bear market, invest new funds over time and at predetermined targets. This avoids the risk of missing a market bottom.
- Rebalance to maintain portfolio allocations between stocks and bonds. This forces you to buy stocks when they go down and sell them when they go up.
If you are uncertain about your investments, a financial advisor can help you with the many factors and decisions involved with investing. Feel free to contact us with any questions at info@L2Wealth.com.
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