Investment Mistakes in a Bear Market

October 20, 2009 by Frugal Dad

er">This is a guest article by Ray, the owner and primary author of Financial Highway, where he discusses investing, saving and practical money management concepts. You can check subscribe to his RSS feed or follow him on Twitter.

Investing seems scary, and investing during a bear market is even scarier. Believe it or not bear markets are an important part of a healthy business cycle, corrections are needed to ensure prices are not overly inflated. It is true that market corrections put a little dent in our portfolios, however the big losses are due to our emotions and investment mistakes in a bear market where we try to reduce losses but actually are losing more. What are some of these mistakes?

Sell, Sell, Sell…

When markets tumble everyone gets freaked out and starts selling without any logical reasoning or attention to long-term goals. As the sell-off continues more investors jump on the train and sell their investments, often they all miss the fact that they are selling at the bottom to only repurchase them back at the top. Stop selling without a reason, only sell if the fundamentals have changed for the long term or the investment does not fit in your plan, not because everyone else is selling in the market.

Stop Investing

The only worse thing one can do than selling out in a bear market is stop investing during the bear market. People get scared and think the markets are falling apart and believe there is no point in investing. Would you stop shopping if retail prices dropped 30%? No. You would probably buy even more because everything is on sell now so you’ll take advantage of the good prices, same concept applies to investing. There is a huge sell going on in the financial markets during bear markets and you should take advantage of it and not hide from it. When you stop investing during a bear market you will miss out on many undervalued investment opportunities which can have great returns in the long run.

Look at Alternative Investment

Some investors start to look at alternative investments because they believe somehow these will perform better than the equity markets. In this recession the focus has been gold investment, gold is reaching all time highs and investors believe gold is a great place to invest. Frugal Dad recently answered a readers question regarding gold, here are my reasons why gold is a bad investment. Although alternative investments have their place in a portfolio the excessive focus during bear markets makes them dangerous.

Timing the Market

Unless you have a crystal ball or have some psychic abilities just stop wasting your time and money trying to time the markets. Investors are more likely to time the markets during a bear market, as there are often big swings, which are seen as opportunities by investors, this strategy will only hurt your portfolio.

I know bear markets hurt, but you trying to “improve” things will only make things worse. Successful investing is not magic, just keep things simple and maybe follow few investing and money rules of thumb and you’ll be fine in the long run.

What were your investment mistakes during this bear market? What have you learned from them? You know anyone who made these mistakes?

Post by Frugal Dad

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