Bear markets, when assets plummet 20% from recent highs, are among the scariest market events you'll encounter. But don't stop investing.
These deep market downturns are unavoidable, and often relatively short -- especially compared with the duration of bull markets, when the market is rising in value. Bear markets can even provide good investment opportunities.
What is a Bear Market?
A bear market is defined by a prolonged drop in investment prices.
- There can be bear markets for a market as a whole, as well as for individual stocks. The S&P 500, for example, hit bear market territory on June 13, 2022. It's down more than 21% for the year.
- While 20% is the threshold, bear markets often plummet deeper over a sustained period.
- Although the bear market can have a few occasional “relief rallies,” the general trend is downward. Eventually, investors begin to find stocks attractively priced and start buying, officially ending the bear market.
- When the market turns bearish, almost all stocks within it begin to decline, even if individually they’re reporting good news and growing earnings.
When do Bear Markets Happen and do they Last Long?
A bear market often occurs just before or after a recession, but not always. Investors carefully watch:
- wage growth,
- inflation and
- interest rates
to judge when the economy is slowing.
Bear markets tend to last about a year on average — versus 1,742 days for bull markets. They also tend to be less statistically severe, with average losses of 33% compared with bull market average gains of 159%.
How you Should Invest During a Bear Market
Consider dollar-cost averaging
If price of a stock in your portfolio slumps 25%, you might be tempted to buy more of this stock if you think the price as cratered.
The problem is, you’ll likely be wrong. That stock may not have bottomed at 75%; it could tumble 50% or more from its high. This is why trying to “time” the market is risky.
A more prudent approach (unless you are nearing retirement) is to regularly add money to the market with a dollar-cost averaging strategy. Dollar-cost averaging is when you continually invest money over time in roughly equal amounts. This helps smooth out your purchase price over time, ensuring you don’t pour all your money into a stock at its high (while still taking advantage of market dips).
During bear markets, all the companies in a given stock index, such as the S&P 500, generally fall — but not necessarily by the same amounts. That’s why a well-diversified portfolio is key.
Investors often favor assets, during these times, that deliver a steadier return — irrespective of what’s happening in the economy. This “defensive” strategy might mean adding the following assets to your portfolio:
- Dividend-paying stocks
Invest in sectors that perform well in recessions
If you want to add stabilizing assets to your portfolio, look to the sectors that tend to perform well during market downturns. Consumer staples and utilities usually weather bear markets better than others.
Keep your eye on the long-term
Bear markets test the resolve of all investors. While these periods are difficult to endure, history shows you probably won’t have to wait too long for the market to recover.
Resisting the temptation to sell is difficult, but it’s one of the best things you can do for your portfolio. If you have trouble keeping your hands off your investments during a bear market, you can have a financial advisor manage your investments for you.
Stay the course. Most of your gains will be time in the market, not timing the market.
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This content is developed from sources believed to share accurate information, and provided by Kelly Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and materials provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.