Regardless of your investment experience, you’ve likely heard some variation of the investing mantra “buy low, sell high” or “be greedy when others are fearful.” Such statements are refreshingly simple and also fairly intuitive—especially when looking at markets with the benefit of hindsight where peaks and bottoms are clearly visible. The reality, however, is that most of us find it difficult to put this wisdom into practice in order to buy or remain invested during volatile markets. 

We’ll examine how emotions are involved and how to overcome them in order to continue investing during bear markets—a strategy that remains crucial to long-term investment success. 

Taming emotions during market declines

Investing amidst a backdrop of elevated volatility is easier said than done. Part of the challenge is that financial assets such as stocks and bonds tend to experience large declines for valid reasons, and unfortunately, those very circumstances that cause market distress often have a way of spilling over into daily life as well. 

Currently, high (and lingering) inflation remains the primary market concern. In an attempt to lower inflation, central banks around the world have been aggressively raising interest rates with the intended outcome of making borrowing more expensive. The thought is that with less disposable income, consumer demand for goods and services will decrease to be more in-line with supply, leading to lower prices (thereby lowering inflation).

The flipside to this, is that one person’s spending is another’s income, so lower spending due to higher rates will most likely result in a recession at some point in the future. Stocks and bonds have declined significantly in response to these rate increases, while also reflecting the market’s best prediction of what future rate decisions and their eventual outcomes will be. 

The degree of portfolio declines we’ve seen this year are never welcomed by investors and can cause significant discomfort, fear and anxiety. Making matters worse, we are witnessing the negative effects of inflation and higher borrowing costs in our daily lives while also being constantly reminded of it—whether it be from news sources or in our daily conversations with friends and family. For these reasons, it understandably doesn’t feel like a good time to invest, regardless of whatever wisdom we may have believed beforehand. 

These emotional and psychological responses—or behavioral biases—are a normal part of  human nature. Research in the field of behavioral finance has demonstrated that most investors feel the discomfort of a loss more than twice as strongly as they feel the enjoyment of gains. This can lead to a strong desire for loss aversion during market downturns, which can tempt us into selling out of our portfolios and fleeing to the safety of cash. For many of us, it's challenging enough to continue holding our existing portfolios during these periods, so the notion of continuing to invest additional savings understandably becomes even more difficult.

Markets will recover 

The good news is that investment success doesn’t hinge on being able to perfectly time a market bottom. This is a relief, since being able to predict the near-term direction of the market is a nearly impossible task, even for the most seasoned investment professionals. Rather than trying to call a bottom, it can be helpful to use history as a guide to showcase how markets have eventually recovered from every previous decline.

Popular investment professional and blogger Ben Carlson has looked at future returns of the US stock market as represented by the S&P 500 Index after it experienced declines exceeding 25 per cent. After these historical declines, he charts the following index performance over the following one-, three-, five- and 10-year periods as illustrated below.

Source: Carlson, Ben. “Getting Long-Term Bullish.” A Wealth of Common Sense, 2 Oct. 2022.