If your portfolio falters in the middle of a turbulent bear market – as it is for just about everyone right now – you need a plan to get through it and you need to act on it. Successful investments made today could benefit from a very long acceleration once the bear market subsides, and mistakes made out of fear could also have consequences for a long time.
With these consequences in mind, let’s take a look at three quick steps you can take to get the most out of the market as it is now.
1. Leverage your high-trust positions
The first thing to do when the market gets tough is to take the opportunity to gobble up stocks of companies in your portfolio that you think will continue to appreciate for a long time, even if their stock price drops in the short term. .
Think of a company like Pfizer (DFP -0.84%), which has seen its shares fall 11% so far this year despite widespread success with blockbuster products like Comirnaty, its coronavirus vaccine, and Paxlovid, its antiviral pill for COVID. If you’re in a position there and the recent drop scares you away from adding more, you’re missing out on a sell – assuming you actually believe it will eventually recover.
So, especially for an investment like Pfizer, whose sales and net income are steadily increasing, it makes more sense to buy stocks than to stay away. The real trick is to keep investing even when the high-confidence picks are thrown around.
And as long as your investment thesis is still as good as it was when you started buying stocks, you’ll get the biggest discounts when things seem to be falling apart the hardest. Just be aware that you may have to wait a few years before your spending starts to pay off with outsized returns.
2. Set up a dividend reinvestment plan
Another great step to take to weather the bear market is to activate a dividend reinvestment plan (DRIP) for your dividend-paying stocks. Take feedback from AbbVie (ABVV -0.54%) over the past 10 years, for example:
As the chart shows, AbbVie’s stock price returns are a far cry from the total return that’s possible by retaining and reinvesting each of its quarterly dividend payments. When you reinvest your dividends instead of accepting them in cash and spending them elsewhere, your position accumulates much faster.
And when stock prices fall during a bear market, the stock’s dividend yield increases accordingly, which means that if you don’t reinvest your dividends at that time, you miss the opportunity to get stock. higher return for the remaining years of your long life.
Additionally, biopharmaceutical companies like AbbVie often have strong cash flow which is sufficient to continue to increase their dividend even in the face of a bear market, recession or other economic problems. This means that if you don’t set up your stocks to reinvest their dividends now, when the bear market ends, you may have missed out on a good chunk of capitalization at a very attractive rate. And it would be a shame to deprive yourself of this bonus which is waiting for you.
3. Do you talk about panic when selling (or buying)
Perhaps the most important action to take during a bear market or stock market crash is to take a deep breath and discourage yourself from selling your stocks in panic. (It’s also helpful to avoid frantically buying downside stocks you’re not entirely confident in, but the price seems like a good deal.) Selling your stocks locks in any losses you’ve incurred , whether or not there is a valid business reason for the underlying company to experience additional headwinds.
In today’s market, it’s true that there are quite a few economic headwinds that make things difficult, but it’s also true that buying high and selling low is a losing strategy. Eventually, the market will recover, and when it does, the stocks you fancy selling could easily come back with a vengeance. Therefore, when you are tempted to end some of your investments, you will regret not backing down, especially if you don’t need the money you invested any time soon.
When I’m tempted to sell due to market chaos, I often find it helpful to just close my browser tab showing my portfolio and take a walk outside.
Alex Carchidi has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.