Image source: Getty Images
After five years of rising US stock prices, global investors got an April shock. After peaking at a record high on 19 February, the S&P 500 index retreated. And when President Trump introduced hefty tariffs on US imports, share prices plunged. It seemed that US stocks were heading for a bear market — when prices drop 20%+ from a previous peak for a prolonged period.
Bear-market blues
Since 1928, the S&P 500 has seen 21 bear markets, or one every 4.6 years or so. In my long experience, all stock-market bubbles and busts have similar causes. Stock prices become excessive until something pricks and bursts these bubbles.
During market downturns, investors worry about their withering wealth. Here are my seven tips to avoid the most common mistakes during steep declines and bear markets alike.
1. Don’t panic! — The front cover of The Hitchhiker’s Guide to the Galaxy by Douglas Adams offered this advice to cosmic travellers. It’s also my #1 instruction for scared shareholders.
2. Daily drops are scary — In a two-day collapse this month, global stocks lost $10trn in value. This sudden, steep decline shocked investors, but the S&P 500 is up 10% since 8 April. Often, calm returns after market storms.
3. Buy the dips? — One powerful market mantra over the past 15 years has been to buy the dip. When stock prices plummet, value-seekers rush in to buy. History suggests this is wise, but it can go wrong during brutal bear markets.
4. Keep some cash — I’ve found that keeping 100% of my family wealth in stocks can be counter-productive. Nowadays, we keep a pot of cash to buy during panic selling.
5. It’s all about the falls — When buying shares, my timescale is five to 10 years. When prices plunge, I love buying into great businesses at better prices. Over decades, this has worked well for my family.
6. Don’t miss the recovery — In the beastly bear market of 2007-09, the S&P 500 bottomed out at 666 points on 6 March 2009. In a devilishly (geddit?) daring move, we dumped cash into US stocks at that time. Since then, this pot has grown to around nine times its original value. Yay.
7. Trim your tax bill — When selling shares at a loss, be sure to use these losses to offset your gains, so as to reduce your liability for capital gains tax (CGT).
With stock prices crashing since mid-February, I’ve scoured the S&P 500 for bargains. Mark Zuckerberg’s Meta Platforms (NASDAQ: META) is now on my buy list.
As with other Magnificent Seven mega-cap tech stocks, Meta stock has been battered. At their record high on 14 February, Meta shares hit $740.91. Alas, this Valentine’s Day love-in didn’t last. The stock nosedived to close at $484.66 on Monday, 21 April. That’s a slide of 34.6% in under 10 weeks.
Meta stock currently trades at $541.13, valuing the owner of Facebook, Instagram, and WhatsApp at $1.36trn. The stock’s price-to-earnings ratio of 22.3 is second-lowest among the Mag 7 and the dividend yield has risen to 0.4% a year.
These fundamentals look too modest, so I aim to buy Meta soon. Of course, if the bear market returns with a vengeance, then Meta’s digital franchise could suffer badly. But I’ll take that risk!
