6 Timeless Investment Principles to Revisit in a Bear Market

This year has been a challenging one for investors regardless of how experienced they are or how much money they have put into the markets.

A shift in macroeconomic conditions across the globe, war drums, and other external factors have affected the performance of most financial instruments although the riskiest ones – stocks and crypto, for example – appear to have suffered the most.

In this particular environment, opportunities will typically present themselves in a unique way. An old investment adage says that the best time to buy is when there is blood on the streets and that means having the courage to invest in something when everyone else is rushing to get out.

However, to pull that kind of stunt, it is important to revisit some timeless principles that have guided the most successful investors during the most trying times. Here’s a selection of six that we think make the top of the list.

#1 – Know the difference between investing and speculating

One of the best definitions for investments that I have read is this: an operation that, upon performing appropriate due diligence, promises the safety of the principal plus an adequate return. Anything else that falls outside of that description can be considered speculation.

The thing is that you can both invest and speculate via your favorite stock market app and that increases the importance of understanding what each activity consists of, the kind of risk that each pose, and the returns that investors may expect from engaging in them.

#2 – Invest in things you understand

The financial markets are a complex animal made up of many moving parts. There are different types of asset classes and the overall structure of the markets can be quite difficult to understand for the untrained.

Therefore, to increase the odds of investing profitably, investors should stick to what they know best. If you opt to invest in stocks, the best alternatives are those whose underlying business is easy to understand. 

Think of Coca-Cola, Apple, or Clorox. These are companies whose business model can be easily understood and that facilitates the task of estimating how much they are worth and if the business has the potential to keep growing in the future.

#3 – Don’t put all your eggs in one basket

Diversification is a great way to mitigate risks when building an investment portfolio. In practice, this means spreading all the available capital across different asset classes. For example, 20% of the money can go to stocks while another 30% can go to bonds and the remaining 50% may go to certificates of deposit.

What diversification achieves is less volatile returns over time as the biggest losers within the portfolio are typically offset by the biggest winners. Even though it is virtually impossible to avoid losses when everything goes south, diversification can reduce the negative impact of a handful of bad investments – which no one is exempt from making from time to time.

#4 – Stay away from expensive advisors, funds, and brokers

Every investor needs a trusted broker, an institution that is properly regulated and that can process and execute operations on its behalf, and someone who can provide some kind of advice or guidance when building a portfolio in case the person has zero knowledge about how investing works.

The cost of these services has diminished lately to the point that it has become negligible compared to a couple of decades ago. With this in mind, it is a good idea to shop around to find zero-commission trading services for those who opt for a self-directed approach or for low-fee advisory services for those who would rather let somebody else do the heavy lifting.

#5 – If something seems too good to be true, it is probably a lie

Money is nobody’s friend and that is particularly true in the financial industry. Everybody is trying to pull money to their end and they achieve this by highlighting the best of what they have to offer while sugar-coating the bad.

Some of the most unregulated corners of the investment world such as the crypto ecosystem are filled with projects that are just plain scams. If the stock market as a whole – one of the most successful money-making machines in history – has delivered average annual returns of 10% in a span of 30 years, it is hard to think that some shady idea can manage to pay a 30% interest rate every year.

In most cases, these kinds of projects end up being either Ponzi schemes or poorly constructed businesses that fail to deliver what they have promised.

#6 – Invest for the long term

In the short term, almost every investment is volatile. One great example of this is bonds – an instrument deemed by many as “the safest”. If you bought some investment-grade corporate bonds days before the pandemic started, the value of these instruments plummeted in a matter of days right after the World Health Organization (WHO) officially acknowledged that the virus situation was critical.

Therefore, the best approach to be successful in the investment world is to buy and hold whatever investment you make – whether that is bonds, exchange-traded funds (ETFs), or stocks.

In the long term, the market typically corrects any distortions created by black-swan events or plain widespread pessimism.


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