My first investment experience was at the start of 2015 (age 18).
My mentality was clear, 1000x my money, buy a yacht, & retire in my 20s. I wasn’t an overconfident teen, I promise...
At first, that was an easy idea to believe, given it was mostly sunshine & rainbows in the stock market for the following years.
But what I’ve learned as an adult is that the party won’t last forever.
My generation (Gen Z), has only learned of bear markets via textbooks, the internet, the 2020 Covid Crash, and our parents at the dinner table. Many of us haven’t directly felt the burden of a financial crisis.
Since investing is a long-term game, and building wealth requires compounding, understanding how to survive a bear market in your 20s can give you a major strategic advantage.
Unfortunately, many smart people begin to do dumb things when markets decline. Here’s what experts say about surviving bear markets.
What Everyone in Their 20s Should Know
- All past declines look like opportunities and all future declines look like risks.
- Markets have always recovered from war, pandemics, & financial crises.
- The news cycles profits from fear.
- Understand your tolerance for risk.
How you emotionally react to down markets can drastically change the trajectory of your financial success.
Understand these 5 tools, to stay on track.
All past declines look like opportunities and future declines look like risks.
Morgan Housel describes one of the great ironies of investing,
“All past declines look like opportunities and all future declines look like risks.”
Flashback to March of 2020.
The market violently reacted to the news of the coronavirus and crashed.
What we learned in the following months was that investing when the market was getting RKO’d was actually quite profitable.
It’s easier said than done surviving a 30% decline, and it wasn’t obvious that the market would make a massive recovery from the bottom on March 23rd, 2020.
History is etched in stone, and seems obvious in hindsight, whereas we see thousands of risks and probabilities playing out in the future.
Not selling is difficult enough during turbulent times, and to go one step further, buying when stocks are down and everyone is running for the exits is even more difficult.
You could be the best stock picker, economist, or data analyst in the world but if you lost your cool in March of 2020, none of that matters.
So if your cash flow allows you to do so, stay invested, or stick with your investment plan no matter the noise because many declines have been opportunities in hindsight.
Markets have always recovered from war, pandemics, & financial crises.
The CFA institute provided a great perspective of market history as America has gone to war.
It’s useful for you to understand the modern history of war as an investor, especially with on-again, off-again news of potential war with Russia.
What this article details in the table below, is that,
“War does not equal bad returns for US stocks. It’s quite the opposite, stocks have actually outperformed their long-term averages during wars and bonds have usually been a safe harbor.”
Although a short-term plunge can be possible when war breaks out, history suggests that any market decline is often short-lived.
If you’re in your 20s, the likelihood of living through that recovery is high.
If a bear market were to happen, it may take months or years to recover, but if history is our guide, markets have recovered and you will too.
The news cycles profits from fear
If you’re an investor, you’ve probably read the quote by the great Warren Buffet,
“Be fearful when others are greedy, and be greedy only when others are fearful”
If you have spent at least 15 minutes on social media today, you’ve probably come across many scary headlines like the one below.
Being fearful is hard-wired into our DNA. In order to survive the danger, our body creates a chemical response to run away called “Fight or Flight.”
Humans are far more likely to click on an article that evokes this “Fight or Flight” response to self preserve. Doing so incentivizes the media to write fear mongering stories.
FEAR = PROFIT.
We are weeks into Putin’s campaign to conquer Ukraine & it’s been a whirlwind of news stories, some true and some fake. And I’d be lying if I said I’m not currently experiencing higher-than-normal feelings of stress, anxiety, and worry.
But here is what the media will never tell you...
Throughout history, humans have dealt with - and triumphed over, various wars and crises.
It’s not irrational or unreasonable if you feel concerned or scared about this conflict.
But keep in mind that financial markets have stood through world wars, disease, and terrorism. In some fashion, we have been here before.
If you’re a long-term investor, this current market environment could be exactly when you not only need to remember Warren Buffett’s advice about what to do when everyone else feels fearful, but to act on it, too.
Contributing to a diversified portfolio right now, ignoring the noise of the media, and leaving those funds invested for at least 10 to 20 years could be a big opportunity.
Know how to manage risk
Billionaire Jeff Bezos has a nice framework for managing risk known as the “regret minimization framework.”
He says to project your future to your 80s or 90s and ask yourself, “At the end of my life, will I regret not having done this?”
My application of this when investing is this...
I can afford not to be the best investor on the planet, but at the same time, I can’t afford to be a bad investor.
If you were to take drastic action like going to cash in March of 2020, you would have missed what followed... The longest bull market in history.
“Risk management comes down to avoiding decisions that can’t be easily reversed, and which downsides will demolish you and prevent recovery.” - Morgan Housel
Avoid actions like:
- Concentrating highly in single stocks or industries.
- Panic selling.
- Trying to time the market.
Take actions like:
- Investing in a diversified portfolio.
- Dollar Cost Averaging
- Having a proper emergency cash reserve.
Successful investing is less about supreme skill and more about clear objectives, realistic expectations, and unwavering discipline to follow a plan.
Rather than attempting to guess when or what will perform best at any given moment, diversify investments to asset classes that have performed well over time (even if at different times).
Bear markets are inevitable and often emotional, but they don’t last forever.
If you are grounded in fundamental principles in your 20s, it will pay off down the road because another bear market is always on the horizon.
You have a time horizon of 10, 15, or even 40 years from now, and staying the course is much more important than the day-to-day noise of the market.
© 2023 Matt Calcagno
All content and opinions expressed on this site is for general informational and entertainment purposes only and is not intended to provide specific advice or recommendations for any individual or on any specific security. This content is only intended to provide information and education about the financial markets and financial planning strategies. To determine which investments may be appropriate for you, consult your financial advisor.