Stock markets rise in value over long periods of time. The long-term investor is rewarded with outsized returns for being confident and patient. But the inevitable rise in value and growth in wealth comes at a cost. That cost is volatility and short-term uncertainty. Every successful investor knows the market’s rise will be interrupted from time to time by the inevitable, unpredictable, and often painful, “bear” market.
Most recently this happened in March 2020 at the onset of the global COVID-19 pandemic. At the beginning of 2020 all signs pointed to strong economic growth with the expectation of continued prosperity. But on March 11, the Dow Jones dropped quickly from nearly 30,000 points to less than 19,000 as fear of the coronavirus and its potential negative economic impact triggered fears that sent global stock prices sharply lower.
This showed again how bear markets can appear without warning. In 2022 the story is more about inflation, supply chain issues, and Russian aggression in the Ukraine. Whatever the trigger may be, bear markets happen. Since this is so, can they be avoided? Can they be minimized? In short, what is the best way to deal with them?
What you should know about bear markets
Here are the five most important things to know about how to be an investor when the bear growls.
Bear markets don’t last that long
This is probably the most important thing to know about bear markets, particularly if you haven’t experienced one yet. If you own stocks during a bear market, take some comfort in knowing that the downturn won’t last for a long time. On this chart from Statista, you can see the COVID-19 effect beginning on February 5th, 2020 that triggered the bear market. It’s a very steep decline, but it’s not one that lasted for very long.
Recovery from bear markets is usually swift
The recovery began on March 18th and was complete by November 11th. Eleven months from peak to trough to new highs again. Bear markets have lasted anywhere from one month to approximately two and a half years before the next recovery rally began. On average, 75% of losses are recouped within seven months of the market’s bottom, and are fully recovered in approximately one year.
Exceptionally strong rallies follow brief bear markets
The point is that downturns are sharp and relatively brief. The patient investor who maintains their confidence is well rewarded. Similar patterns have occurred following all previous bear markets. For example, stock prices jumped 42% in the first three months after the fall of 1982, while the low of 1990 led to a market gain of 31% in four months.
This is one of the keys to making successful investment decisions: always play the long game. The markets will always rise to new heights following a bear market. If your goal is to build a secure retirement nest egg, occasional short-term market declines mean very little in the grand scheme of your long-term investment strategy. Bear markets are brief, but the rallies that follow can earn you even more returns.
Stocks provide higher returns than other asset classes
You cannot earn the returns that stocks provide if you are not invested in them. Being out of the stock market when it is rising is more of a risk to your long-term investment plan than having to endure the temporary discomfort of a bear market.
Running for cover may seem like a smart move, but experience proves otherwise. $1,000 invested in the S&P 500 from 1990 through 2020 would have grown to $20,451. If you had missed just the best 5 Days you would only have $12,917. Had you missed the best 25 days your return would only be $4,376. The lesson is clear. Stay invested.
Don’t turn a temporary price decline into a permanent loss
Bear markets are fleeting and markets recover to new highs. That’s what markets do. This is why you shouldn’t focus on day to day price changes, try to predict future behavior using misleading average returns, or pay attention to the latest catastrophist screed attempting to convince you that it’s different this time. Avoid the temptation to turn a temporary decline into a permanent loss by selling and forfeiting your future financial well being.
How to manage your investments during a bear market
So what should you do following a bear market or massive sell-off? There are a number of tactics that savvy advisors use to grow the value of their client’s wealth. The most important of which is to keep the focus on the long-term financial plan and ignore the day-to-day headlines.
Having a plan supported by a written investment policy along with the discipline to follow it has always been a winning formula. Confident investors achieve their goals and maintain their peace of mind by keeping their eye on those long-term goals and avoiding distractions.
Seek help from a financial advisor
Financial planning, like everything else, is easier when you have an experienced guide to show the way. Let us be that guide. Reach out today and find out how to get started. You deserve to retire comfortably. You deserve to be confident that you’ll have enough money to buy everything you need for a lifetime.
