Three ways to keep your cool in a bear market

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If you’ve been reacting to the market emotionally given what’s been happening recently, then I hear you.

Who wouldn’t be reacting in that way? Let’s be honest with ourselves, it’s painful to watch your portfolio diminish in value. We’re only human.

So human in fact, that on a cellular level we are biologically programmed to panic in times of market volatility. 

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One part of our brain sounds a biological alarm that floods the body with fear signals when we are losing money. It leads to our emotions getting the best of us – quite literally.

It certainly doesn’t help when media outlets report doom and gloom at every opportunity. Inflation is up! Pending recession! War in Ukraine! 

Due to our heightened sensitivity, we become magnets to negative bias, and that leads us to react emotionally.

In times like these, it’s important to identify the characteristics of fear and challenge it directly. It’s vital to separate facts from feelings to make better judgment calls and decisions.

Let’s start with looking at the facts.

Understanding the causes of market volatility doesn’t actually affect your next steps. What you should be concerned with is how to navigate the volatility of the market in any situation. Here’s what you should do:

1. Hold your ground and adopt a big-picture perspective
   Periods of market volatility, market corrections, and bear markets are a normal part of investing. Markets tend to go up over time, but they don’t do so in a straight line. The truism “there is no gain without loss” will always hold true for investing.
2. Remember the lessons from the financial crisis
   We learned a decade ago that life goes on. Markets recover. And those who try to time volatile markets often lose out. Investors who kept their heads and their money working during the financial crisis benefitted the most. Apply those lessons now. Don’t panic, stay disciplined, and look for the investment opportunities that market lows can present.
3. Be aware of the cognitive biases that aren’t helping
   Loss aversion theory states that people experience the pain of loss about twice as strongly as the pleasure of a gain. This is why we react so strongly when we experience a financial loss.

Another concept called “anchoring” can be detrimental as well. It’s when investors anchor on the highest value their investment portfolio has reached. 

For example, if your portfolio was at $100,000 in January and now it’s $85,000 it probably feels like you’ve lost $15,000. Thinking this way ignores the fact that a year ago perhaps you started off with $80,000, and five years ago it was $30,000. The value of your portfolio is still up compared to when you first started, and the market will likely rise to new highs in the future.

Stay disciplined, and stay invested.

Mark Chahwan is co-founder of Dubai-based investment platform Sarwa