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How to Keep Calm in Bear Markets

If where the Straits Times Index (SGX: ^STI) was sitting at last Friday was any indication, fear is widespread in the stock market now.

At the time of writing, the STI has slipped further, crossing into bear market territory (defined as a drop of more than 20% from a recent peak). Times like these tend to scare the common stock market participant into selling their stocks when the better course of action would be to hold on or to add to their investments.

There could be good reasons why fear is common in a bear market and if we can understand the source of fear, we can then start to address it.

Why fear is common

Financial journalist Jason Zweig covered this topic in his book Your Money and Your Brain. In the book, Zweig quoted neurologist Antonio Damasio and added his comments after:

““Money is a symbolic token of the problem of life,” says neurologist Antonio Damasio. “Money represents the means of maintaining life and sustaining us as organisms in our world”.

Seen in this light, it’s not surprising that losing money can ignite the same fundamental fears you would feel if you encountered a charging tiger, got caught in a burning forest, or stood on the crumbling edge of a cliff.”

Put another way, losing money appears to invoke a primal fear that can even feel life-threatening to a person. This could be why the common stock market participant may sell his or her investments in haste.

Keeping a cash cushion

This is also why it’s important to keep a cash cushion. I had written about keeping a cash cushion in November last year. I talked about it again in July this year.

My colleague Chong Ser Jing had expressed previously that the stock market has been, and will be, volatile. The difference between having satisfying or disappointing returns rests partly on how we prepare for moments of fear as we invest for the long-term in mind.

If the source of fear is losing money, then consider preparing a cash cushion over time as it can help you smooth over fearful times like these. If you are in it for the long run, having a cash cushion may be a good long-term strategic move to consider.

A Fool’s take

Some may say that keeping cash un-invested in the portfolio is not the most optimum use of your financial resources. And they would be right, mathematically.

But investing is not about math alone.

If the stock market was all about math and stone-cold equations, then mathematicians will rule the stock market. But they don’t. Investing also involves psychology, such as your ability to keep calm while others are losing theirs. And if a cash cushion gives you a leg up in keeping calm, it may be well worth you time to consider it for the long run.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn't own shares in any company mentioned.