If you’ve been in the stock market for a long time, and I’ve been investing for 25 years, you’ve already been through some steep drops. I definitely remember the swan dive of 2000 and the crash of 2020. And many of us remember the financial crisis of 2007-09. Now we have runaway inflation and a war in the Ukraine. And the market has taken some nasty hits in 2022.
So how do we maintain confidence when so many people fear the stock market? Here are some tips.
Focus on the long term
The good thing about this bear market, as far as I am concerned, is that it is a macro event. That means it’s affecting the entire stock market. What can be very scary is when the only stocks that are falling in the market are the ones you own.
When it’s a bear market and the vast majority of stocks are falling, I’m actually less afraid. That’s because market crashes have happened many times in the past. And they will also happen many times in the future. But the important thing to remember is that after each one of them, there is a recovery. And the stock market keeps going up and to the right over time.
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Our graphics provider doesn’t go back 100 years. If it did, the long-term direction of the stock market would be even more obvious. So don’t be afraid. We have always bounced back from major crashes in the past, and we will bounce back from this one too.
Remember, over time, an ugly drop (like 2022) turns into a little squiggle on the chart.
Track your returns over time
I keep track of my portfolio on Yahoo (which is free) and also create watchlists for stocks I might want to buy in the future. I track over 100 stocks that way. That’s an easy way to judge my performance. In fact, it can be a bit of an aggravation, as sometimes the shares in my hypothetical ports outperform the shares in my real money ports. Overall, though, this gives me confidence in my stock-picking strategies.
One thing that gives me a lot of confidence is that I know how I am doing against other investors. At Motley Fool, we invite people to make stock calls and track their performance against the S&P 500. It’s called Motley Fool CAPS. I recommend that you use this tool. It’s free and you can see how your stock picks perform against the market over time.
I’ve been playing CAPS since 2007, which gives me a huge advantage over recent players. Why is that? It’s because of the miracle of compound returns. For example, I made a bullish call on Apple (NASDAQ:AAPL) at CAPS in 2007, and I still have it. If you bought Apple stock in 2007, you know it was a good buy.
Short-term volatility says little about your investment capabilities
In general, I am in the top 2% of investors who play Motley Fool CAPS. Six months ago, I was in the top 1%. This drop in performance, from the top 1% of players to the top 2% of players, reflects how bad news 2022 has been for my stock so far.
So has this recent bad news damaged my confidence? No. While my returns have been ugly this year and I am doing twice as poorly as the market, I can put this into a long-term perspective. After all, being in the top 2% of investors isn’t bad at all.
Imagine, for example, a crypto millionaire who is down 60% in 2022. His net worth has dropped from $10 million to $4 million. Should I panic and say, “I’ve lost $6 million!” Or do you take 2022 in stride, like market volatility?
If you’re a novice, a 60% drop might terrify you. But I’ve been doing this for a long time, and I’m used to short-term volatility in my high-risk stocks. I am actively buying in this market. I wish I had more cash so I could buy more.
I’m buying because the subprime stocks I love to buy are cheap historically. The market has no appetite for risk at the moment. Multiples are being cut. The bears are on a rampage. And all this fear has been included in the price. So I love the long-term opportunities that I see.
What if you’re not sure?
If you’re not confident in your stock-picking skills, you may want to buy an index fund that tracks the S&P 500. Because the American stock market, over time, is an incredible (and highly profitable) investment vehicle.
There is no perfection. You will have failures. But as you go through this process of researching stocks and doing the best you can, you’ll build more and more confidence (and net worth) over time.
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Taylor Carmichael has positions at Apple. The Motley Fool has positions and recommends Apple. The Motley Fool recommends the following options: $120 long calls in March 2023 at Apple and $130 short calls in March 2023 at Apple. The Motley Fool has a disclosure policy.