How I prepare for better days in the stock market

It was a humbling year for the stock market. As of July 12, the three main indices — the S&P500, Nasdaq Compoundand Dow Jones – are down more than 20%, 28% and 15%, respectively. Bear markets are not new to Wall Street; they have happened in the past, and you can bet they will continue to happen in the future.

However, as an investor, the one thing you don’t want to do during bear markets is panic. Instead, use this time to your advantage. Here’s how I’m preparing for better days in the stock market.

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Shop at a discount

If you believe in the long-term potential of a stock, you shouldn’t be discouraged by short-term price declines. On the contrary, you can see this as a chance to grab some of your favorite investments at a discount and potentially lower your cost base. The cost basis is the average price you paid per share of a particular stock, and it ultimately determines how much you profit (or lose) from the sale. If you bought 10 shares at $100, 10 shares at $150, and 10 shares at $200, your cost base would be $150.

When you invest in a particular stock, you need to be prepared to hold it for the long term. warren buffet once said, “If you’re not ready to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

With that in mind, if you had invested in a stock when it was at $200, seeing it at $150 should be a good deal for you, especially if nothing has fundamentally changed in the company. Value investing involves finding stocks that are trading below their intrinsic value, and bear markets provide a great opportunity to do this.

Increase my positions in the main indices

The one thing you don’t want to do while bear markets is to stop investing, because it usually ends up being counterproductive. Rather, you should invest in the broader market instead of focusing on individual companies that may not be able to weather the storm and see better days. Although specific companies may not survive tough economic times and market downturns, the stock market as a whole (usually measured using major indices) has historically rebounded from bear markets.

In the past few decades alone, the three major indices have survived some of the most trying economic conditions in US history. They rebounded from Black Monday (1987), the dot.com collapse (late 1990s), the Great Recession (2008-2009) and the pandemic (2020-2021), and there is no reason to believe that they will not recover from the current bear market.

Diversification is one of the main pillars of investing, and it becomes even more important during downturns. You never want the success (or failure) of your portfolio to rest on too few companies; instead, put your money in the broader stock market and trust the sun after the rain.

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