If the prevailing economic outlook for the U.S. is accurate, we're headed for a recession later this year. And, unfortunately for investors everywhere, recessions can be problematic for the stock market. While the S&P 500 has recouped some of its 2022 losses since January, things could go sideways again if economic conditions deteriorate.
That's why bear markets can drive down stock prices of even the most resilient companies. This is one of the more frustrating aspects of a bear market, particularly for novice investors who haven't experienced it before.There's no way to avoid a bear market short of staying out of stocks entirely—which isn't an option if you want to build wealth. The next best strategy is to accept the downcycles and use them to improve your long-term investing returns.
At the end of the day, bear markets are part of the investing process. Recognize that fact and turn your focus towards using bear markets to raise your long-term returns.The basic profit-making formula is to buy an asset and hold it until the value increases. Many investors focus on the second half of that formula, by waiting for their stocks to appreciate. But bear markets create the opportunity to pursue profit-making differently, by lowering your buy price.
In short, buying low sets you up for bigger gains in expanding markets. It also reduces your downside risk in future bear markets.Investing in bear markets isn't easy emotionally, which is why many investors don't do it. You must be able to stick to your plan even as your portfolio's value swings wildly.
With inflation running high at 4.9%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Fast forward 23 years and you might be happy to have secured Microsoft for $58 per share. Today, a share of MSFT sets you back $320 per share. Had you bought Microsoft at its 1999 peak, you'd have eventually made money—just by waiting for the recovery.
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