As stock markets prove volatile with endless speculation about a possible crash, it can be disheartening for investors. For times like this, though, I have five rules to stick to in order to navigate a bear market safely.
Stay invested
The first rule is to keep investing whenever I have money available to do so. As some share prices go lower, it can be depressing and it can seem like putting money to work in stocks is a waste of time.Â
Over time, I expect share prices to recover, though. And if I don’t take the opportunity to invest while markets are down, I think I’ll regret it later when stocks are more expensive.
Stay safe
Second, it’s extremely important that I have enough money to meet my other expenses. A falling market is bad for me only if I have to sell investments while prices are low.
As a result, my second rule is to keep enough money in cash to cover my everyday costs, as well as a substantial emergency fund. While it can be tempting to plough money into stocks to take advantage of low prices, if I find myself overcommitting and having to sell, that will be bad for me from an investment perspective.
Stay patient
A falling stock market can offer great opportunities. But it’s important to me to remember that prices aren’t cheap today because they were more expensive yesterday.Â
Taking Games Workshop as an example, the stock is down 31% since the start of the year, but it’s price is still higher than I’m willing to pay. My third rule is to stay patient, make sure I know what I want to pay for a stock and wait for share prices to reach those levels.
Stay focused
When share prices move suddenly, it can be tempting to think that things have changed from an investment perspective. But the underlying businesses are what matter to investors, not the stock prices.
That’s why my fourth rule is to keep paying attention to the companies that I own, not the stocks. The share price represents what I can sell the stock for, the business is what will generate the investment return for me.
Stay diversified
Lastly, I think it’s important to make sure I take advantage of opportunities broadly. It’s always possible that I might misjudge any one investment and that can be a costly mistake in a falling market.
Accordingly, my fifth and final rule is to stay diversified in my portfolio. By owning a variety of different stocks in different sectors, I can maintain a portfolio that’s protected from the effects of any single event.Â
And finally…
It’s relatively easy to summarise my rules for navigating a bear market. They’re the same type of rules that I think I should follow in any other type of market.
My rules tell me to focus on investing in quality companies at good prices, building a portfolio, and managing my money carefully. In that sense, I think they’re good rules to follow whatever the stock market situation.