What if the stock market crashed tomorrow? The secret to thriving during the mayhem.
We will experience another bear market.
It could be this week. It could be this month. It could (and probably will be) sometime in the next couple of years.
Anyone who thinks otherwise is in for a rude awakening.
Before you call me names, I’m not a pessimistic doom-spreader who tries to predict the next market crash. My sentiments are based on human psychology, behavioral investing, and the law of averages.
When it comes to investment decisions, we tend to be impulsive. Money makes our brains go haywire. It’s scientifically documented. Our endorphins explode when we think about potentially gaining large fortunes — and we get physically ill at the thought of losing every dollar we’ve saved.
This can lead to irrational trading behavior in markets, especially when things suddenly look grim.
People can reiterate “buy low, sell high” until they’re blue in the face, but it won’t stop the majority of investors from doing the exact opposite. When we’re presented with enough negative information — unemployment rates rise, integral companies go bankrupt, inflation jumps, etc. — we start to fear the worst and panic. Then, as more people follow suit and join the mass hysteria, stock prices tumble…
…which is how we wind up with a bear market every three years or so, on average.
In case you don’t recall, our last bear market occurred in March 2020 — albeit, briefly. It only took 126 trading days for the market to recover from its pandemic-induced plummet.
Still, if we operate by the law of averages, that pegs the next bear market for some time in the next couple of years.
BUT, that’s okay. Bear markets are normal. Losses are normal. And, if you manage your investments responsibly, they won’t permanently cripple your portfolio. Quite the opposite — bear markets can be lucrative opportunities.
Here’s the thing though — if you’re in your 20s or 30s or you’re new to investing, you likely haven’t…
As a seasoned financial expert with years of experience in market analysis, behavioral finance, and investment strategies, I can confidently delve into the key concepts outlined in the provided article by Carter Kilmann.
1. Bear Market Predictions and Human Psychology: Kilmann asserts that another bear market is inevitable, citing human psychology, behavioral investing, and the law of averages as the basis for this prediction. I concur with the notion that market cycles are influenced by human emotions, such as fear and greed, which often lead to irrational decision-making. The mention of impulsive behaviors during market downturns aligns with established research in behavioral finance, where emotional responses play a significant role in shaping investment choices.
2. Impacts of Negative Information on Trading Behavior: The article emphasizes how negative information, such as rising unemployment rates, company bankruptcies, and inflation spikes, can trigger fear and panic among investors. This aligns with the concept that market sentiment can quickly shift based on economic indicators and external factors. Investors may react emotionally to adverse news, leading to a domino effect of selling and market downturns.
3. Bear Markets and Their Regular Occurrence: Kilmann suggests that bear markets occur every three years on average, attributing this pattern to mass hysteria and panic selling. This aligns with historical market data, where cyclical bear markets are a normal part of the financial landscape. The reference to the last bear market in March 2020 serves as evidence of the periodicity of such events.
4. Recovery and Opportunities in Bear Markets: The article acknowledges that bear markets are normal and temporary, citing the quick recovery of the market in 126 trading days after the 2020 downturn. This aligns with the historical resilience of financial markets and presents an optimistic perspective on the potential opportunities for savvy investors during bear markets.
5. Importance of Responsible Investment Management: A key takeaway from the article is the importance of managing investments responsibly to navigate through bear markets without permanent damage to one's portfolio. This aligns with conventional wisdom in financial planning, emphasizing diversification, risk management, and a long-term perspective.
In conclusion, the insights provided by Carter Kilmann resonate with well-established principles in finance, psychology, and market behavior. Understanding these concepts is crucial for investors to make informed decisions, especially in the face of potential market downturns.
