First Bear Market: How Falling Stocks Affect New Investors

When Tanya Trevett divorced in 2019, she didn’t just become a single mom of three. She also became a manager of her own money for the first time.

The author and Boston-based mental health advocate started investing on her own in 2020 and really got going that spring — just as COVID-19 hit the U.S. and stocks crashed before recovering rapidly. She bought shares of two biotech companies she was interested in, Organogenesis Holdings and Agenus, and invests primarily in a diversified portfolio across all sectors and company sizes. Last year, when the stock market hit record high after record high, Trevett’s stock portfolio grew by 20%. She felt “on top of the world”.

Today is a different story.

First bear market for new investors

Stocks entered a bear market in June, and investors experiencing their first major downturn are especially likely to feel the pain. The S&P 500 – a benchmark commonly used to measure overall stock performance – is down about 20% for the year, and shares of companies that have risen during the pandemic like Amazon, Zoom and Peloton are down. of 33%, 35% and 70% for the year, respectively.

It’s hard not to panic when you see your account go down, admits Trevett, 52. His hands get sweaty just thinking about his shrinking balance.

“There’s an instinctive feeling of, ‘Oh my god, I just lost all my money and how am I going to support my kids? What if it keeps going down and I can’t pay my mortgage? “”, She says. “It’s scary, especially when you read all the headlines and pessimism of a bear market.”

Of course, you don’t lose money until you sell, but Trevett isn’t the only one scared.

In the first year of the pandemic, newbies across the country flocked to the market, dumping billions of dollars as stock prices seemed to only rise. People as young as high schoolers have taken up investing as a hobby, thanks in part to popular trading accounts like Robinhood and fractional shares, which allow people to invest in their favorite companies for as little as $1. Eager new investors couldn’t get enough of risky assets like cryptocurrency (even taking dating apps to chat), options trading, and SPACs.

The fervor initially made sense as prices continued to rise, supported by government stimulus funds and near-zero interest rates. Besides, people were hungry for something, anythingto do while everyone was stuck at home.

These investors were expecting a rude awakening. After peaking last January, financial markets have collapsed, largely on the back of interest rate hikes from the Federal Reserve, which recently implemented the largest rate increase since 1994.

For investors who started putting money into the markets during the pandemic, this is the first time they’ve seen their investment accounts really hit. It’s understandable, it’s scary.

“The first bear market you go through as an investor will shape you for the rest of your investing life,” says Liz Young, chief investment strategist at digital personal finance firm SoFi. “You’ll never forget how it happened, how much money you lost, and you’ll probably learn more right now than in a lot of future time.”

For many investors, it’s hard to see the silver lining of lessons learned when your portfolio is depleted. Money spoke to new investors about what it’s like to experience their first bear market and how they try to stay calm when stocks go haywire.

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‘Trying not to panic’ as stocks fall

After years in which it seemed like the stock market couldn’t hurt, it’s only right to rethink investing now. Keimani Woods, 30, started investing in 2021, and her balance is down about 16% for 2022. Although she’s “trying not to panic about it too much,” it makes her a bit hesitant to invest more money now, even though she knows that with low prices, it’s a good opportunity to do so.

The trick, she says, is to think about the big picture and keep perspective. That way, when she gets nervous about seeing her account balance drop, she can keep in mind that bear markets are actually quite cyclical. In other words, they are common and predictable: there have been 14 bear markets before this one once since World War II, according to Bespoke Investment Group.

“It’s a lot to realize that the money you’ve invested has gone down so much, but the time we’re going through – with a bear market and probably a recession coming – is something that’s happened before. “, she recalls. se. “This is not the first bear market. This is not the first recession.”

Additionally, Woods, who works as a program director for a wealth management company in Woodstock, Georgia, feels a little more confident in her portfolio since the $14,000 she’s invested isn’t money she’ll need anytime soon.

His strategy is in line with what tons of financial advisers recommend: don’t invest the money you’ll need in the near future, like college expenses or a wedding coming up soon. Instead, they say build an emergency fund for three to six months, pay off high-interest debt like your credit card balance, and invest with a long-term view.

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A long-term investment approach wins

One of the biggest lessons investors can take from this bear market is that no trend lasts forever, Young says.

Ted Zhang found out the hard way. The 21-year-old College of William and Mary senior was swept away in what he calls “the SPAC euphoria”. Special purpose acquisition companies – commonly known as SPACs or “blank check” shell companies – are a way for companies to go public without having to go through the traditional IPO process. Their popularity exploded during the pandemic as investors searched for one of the next giants in the making.

One day in the summer of 2020, Zhang earned $20 worth of stock in aerospace company Boeing. It got him hooked. He then invested around $8,000 he had earned working for DoorDash and UberEats in individual stocks, cryptocurrencies and SPACs. After contributing another $12,000, Zhang saw his wallet reach $130,000. But alongside other risky investments like cryptocurrency, SPACs fell during the market downturn as investors sought to remove some of that risk from the table.

Of all the assets Zhang invests in, he is down about 50% from the high point in his portfolio.

“Since then, I’ve been very strict on my rules and principles,” says Zhang, who is an active trader and does technical analysis of investments he buys and sells anything that falls below 7%. He is also still up about 200% from his initial investment.

Getting caught up in the hype like people have with SPACs is not uncommon. There’s even a name for it: recency bias, which is when investors favor more recent events instead of considering the evolution of trends in a historical sense.

“People kind of got caught up in the momentum of things and the trend of things,” Young says. “There is always a turning point.”

That’s why it’s so important to have a solid, long-term approach to investing, instead of trying to buy the dip or predict the next big thing in the markets.

“No matter what kind of stocks you buy and no matter how much you believe in them, nothing is safe in an environment like this,” Young says. So don’t be seduced by your stocks or any fad investment scheme, she adds. “If you fall in love with the prospect of something and ignore the environment that might pose risks, you’re going to hurt yourself.”

It can be difficult for investors – new ones, in particular – to keep their emotions to one side and avoid reacting hastily to the latest market shakeouts. But it’s the kind of discipline that helps you become a successful long-term investor. Young stresses that it’s essential to always maintain an objective, data-driven point of view.

Every investor experiences market downturns differently, so it’s important to figure out the best way to stay calm and stay focused on your long-term plan. For Trevett, learning not to obsessively check his account balance has been crucial to his mental health.

“Don’t open it because you’ll panic and want to sell,” she advises other new investors. “Remember what your long-term goals are.”

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