Five mistakes to avoid during a bear market
Here are five common errors that can make a down market even worse:
1. Timing the market
We’d all love to get out of the stock market at the top and in at the bottom. But academic studies have long shown that market timing is almost always futile. Many use a 200-day average stock price as a market-timing tool; they sell once a fund’s price dips below its average price and buy when it rises above that average. In the past 12 months, the S&P 500 crossed its 200-day average price 10 times. Frequent trading racks up transaction costs. If you’re in a taxable account, your short-term capital gains — unlike long-term gains — are taxed at the same higher rate as ordinary income.
2. Panicking
Consider the market meltdown on Feb. 5, when the S&P 500 shed 44 points for a huge 3.2 percent loss. As a mutual fund shareholder, you would have sold at the fund’s price by the end of the day. As a result, you would have locked in your 3.2 percent loss.Typically, the market rallies a bit after a sharp decline. In this real-life example, you’d have regained your entire investment, and a bit more, by Feb. 26. If you’re investing for a long-term goal, such as retirement, take a deep breath and remember: This, too, shall pass.
3. Using high-cost funds
The more you pay your fund company, the more money you’ll lose once the market turns south. You can find a fund’s expense ratio in its prospectus. Or, armed with your fund’s ticker, you can find it on USA TODAY’s Web site at money.usatoday.com.
4. Turning to bear funds
Some funds are designed to rise when the stock market falls, which is beneficial in a bear market. Problem is, these funds are also designed to fall when the stock market rises. And the stock market rises more often than it falls. (The average bear market lasts 382 days, according to the Stock Trader’s Almanac, while the average bull market lasts 721 days.) Unless you can sell your bear-market fund in time, it’ll eventually prove to be a drag on your portfolio.
5. Quitting
The biggest single factor in your success as an investor is how much you save – not how much return the stock market gives you. If you fear that you’re not going to meet your investment goals, your best remedy is to save more.