How new investors can handle their first bear market

Many investors who had started investing in the last two years, are experiencing their first bear market. None of the preferred investment products of Gen Z—cryptocurrencies, NFTs, e-commerce IPOs, stocks—have been spared. These investors are too young to remember the rout of 2008 and having only seen insane valuations and returns, are finding it difficult to accept losses. All those who mocked simple, sound, cautious advice as being old fashioned are astounded at how quickly things can go bad.

Overconfidence tends to blur out risks. New investors were making large sums of money in such a short span that they felt invincible and made speculative investments. The same overconfidence is also getting people to believe their investment bets will recover and hence they are considering buying more to average out. The current prices may seem a fair value, but were these the right investments to choose in the first place? Many of these investments products like cryptocurrencies, NFTs, e-commerce IPOs may not see their highs, given that they were overvalued and unprofitable in the first place.

Some first-timers are exiting the market in the hope of being able to re-enter at its lows. It is impossible for anybody to know when any market will bottom out. Markets are unpredictable and could recover very quickly like in 2020 or take a long time like in 2009-11. Even during a rebound, investors usually take time to get back in, so much so that one might as well as have been invested. For those investors perturbed by the current downtrend, it is time to get back to the drawing board!

Start with the basics. Ask yourself why are you investing? What is the end use of the money that you are investing? Once you figure this out, you will know where to allocate funds based on your investment horizon.

Where are you investing? Simply buying any stock isn’t going to grow your wealth. Make a plan based on your goals and stick to simple boring investments which give decent average returns in the long term. There are a wide variety of mutual funds, which can be considered. It can be difficult to figure out which fund to invest into. An easy way is to refer to Mint20 – a curated list of 20 schemes, chosen based on quantitative and qualitative parameters. Junk the coins and Jpegs (NFTs) and cut your losses in IPOs.

Remember, the best things in life take time. The fastest way isn’t the best way. Investments need time to grow and patience is what grows wealth (provided you choose the right investment!).

Investments should be done based on research and not based on tips and hearsay on social media. Stop believing in stories being churned out about disruptive businesses, new age investments and the like. In the long term, stock prices move based on profits, and all the stories being put out by influencers are just stories which don’t turn out to be true. Leave the stock picking to the professionals. Use your time to further your profession or pursue your interests. That is going to be more enriching than spending time trading stocks. Investors also do not realize the impact that constantly tracking (or transacting) their portfolio has on their mental health.

Every year, the best performing asset class changes. Gold, which topped in 2019 and 2020, was at the bottom in 2021. No one really know which investment or asset class will perform the best in 2022 or in 2023 and beyond. It is best to diversify your investments across equities, bonds, and gold rather than focusing on concentrated short-term allocations. The bear market experience can provide great learning opportunities. It teaches us to appreciate reality over narratives. It also teaches us how to take the right risks. Utilize this opportunity to make corrections. For example, instead of trading in small cap stocks, move to a small-cap fund or if you want lower risk, to a flexi-cap fund.
Bear markets can be painful but markets end up positive most of the time in the long run. The key is to not stop investing and have nerves of steel.

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