This Is the No. 1 Move Investors Should Make Before Buying Stocks Right Now.
Key Points
Bear markets are normal events on Wall Street, even though they feel terrible when they occur.
Market risk is high right now, and you need to make sure you aren't stretched beyond your risk tolerance.
Bank of America (NYSE: BAC) has warned about the risk of a market correction. JPMorgan Chase (NYSE: JPM) CEO Jamie Dimon has highlighted the "tectonic plates" that could collide and cause a market earthquake: elevated valuations, geopolitical conflict, inflation, and high debt levels. Such warnings don't mean you shouldn't buy stocks, but they suggest that you should assess the amount of risk you are taking on when you do. Here's the No. 1 move to make before buying stocks right now.
Be honest with yourself about risk
I lived through the dot-com crash and the Great Recession's bear market. They were brutal periods for investors, with stocks falling day after day, slowly eroding the value of my savings. Unless you have lived through a deep bear market, it is hard to understand just how unsettling it can be. Forget the claws of the bear; fear is what claws at your mind day and night as you worry that you will lose everything. Jamie Dimon's "tectonic plates" analogy is eloquent, but don't let his fancy words hide the truth: there is material risk today that your portfolio could be brutalized by a bear market.
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I'm being a bit over the top on purpose with my wording. If you have lived through a deep bear market, you'll likely understand why. If you haven't truthfully and deeply evaluated your ability to tolerate risk, a bear market will be a huge shock to your system. That's the No. 1 move I recommend right now, assessing your risk tolerance.
That doesn't mean you shouldn't buy stocks. But it may mean thinking carefully about leaving more cash in your accounts than usual. Cash provides a refuge in downturns and gives you the firepower to buy stocks while others are selling out of fear. Or, perhaps, give more consideration to diversification. Do you really need to own another high-flying artificial intelligence stock, a sector filled with market darlings? Or would it be better to buy a dividend-paying consumer staples company that sells necessity products people buy in good times and bad?
And then there's margin debt, which are loans investors take out to buy stocks. Margin debt currently sits near record levels, which highlights the risk-taking mood that prevails on Wall Street. But leverage cuts both ways, making gains larger and losses worse. It could be time to rein in your margin debt, if you have any.
Pay attention to risk before you are fearful
Emotions are likely to be the biggest impediment to your long-term investment success. When your emotions swing too far in either the positive or the negative direction, you will be more prone to make mistakes. With markets at extreme levels, now is the time to consider risk and make adjustments. If you don't, fear will likely drive your decisions in a bear market. And make no mistake, while there's no telling when it will arrive, a bear market will eventually come calling.
Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.