A bear market can be stressful, so seek expert help
As Sir Isaac Newton said, “What goes up must come down” and unfortunately that also applies to the stock market. However, just because we know this to be true doesn’t make watching your portfolio fall any easier. The silver lining is the knowledge that this isn’t the first time, nor will it be the last, and we have past experience to guide us through this current bear market.
What is a bear market?
A bear market is when a long lasting drop in investments occurs, usually before or after the economy moves into recession. During this time, investors watch economic signals such as hiring, wages, inflation and interest rates. If they see the economy shrinking, investors predict corporate profits to decline. As a result, they sell stocks. A bear market can mean unemployment rates will increase and a tougher economy is in the near future.
There have been more than 14 bear markets in the S&P 500 since 1926 and on average, they last less than one year.
There are steps you can take to hedge against a down market and avoid making costly emotion-driven mistakes.
Avoid making emotion-based decisions: When the market drops, and you watch your investment portfolio decrease in value, it can be tempting to pull out and put everything into cash. By selling when the market has drastically fallen, you’re at risk of permanent loss of capital. During an unknowing time, it is important to focus on your time in the market and not marketing timing.
Reassess your long-term goals and risk tolerance: During a bear market, it may be easy to forget how stressful it can be when your assets decrease in value. Think about your future, if you are soon to be retired, it could be smart to not take risks. Usually, the higher the amount of stocks in your portfolio, the riskier it may be because you’re less diversified through other kinds of assets that may experience less volatile price swings. It is important to diversify your portfolio during a bear market. If you are invested in a mix of winners and losers, it helps decrease your portfolio’s overall losses.
Continue your systematic investment contributions: Using the dollar-cost averaging strategy is a great way to make sure you are investing consistently. Making regular contributions to your portfolio can offer you efficiency when the market is down. If you invest a fixed amount of money regularly, it is likely you will be able to purchase equities at a more affordable price. You might be lucky enough to see the shares rise in value when the market rebounds. By using the dollar-cost averaging strategy, it can help you avoid putting all your money into a stock at its high. During a bear market, focus on potential gains.
Find Strategic Investment Opportunities: There are many investment opportunities during a market downfall. Look at the sectors that perform well during negative markets. Consider consumer staples, healthcare, utilities, companies with higher-quality businesses, and higher-quality stocks paying dividends. Another thing to consider is accounts that are overseen from an outside party for the owner’s benefit, known as a fiduciary account. When the markets are down, professionally managed funds could possibly outperform passively managed funds.
Rebalance Your Portfolio: During a bear market, your equities can appreciate or depreciate faster than your bond or cash holdings which makes your portfolio out of alignment. This is an opportunity for you to consider if imbalances have occurred. For example, if equities make up a large part of your investments, you may consider selling stocks and moving that money into cash equivalents or bonds during this time. If you do this, keep in mind stocks on average lose 36% of their value during a bear market.
On bear markets, Brian Drane, LPL Financial Advisor says, “I’ve reminded my clients to remember their time horizon. As most bear markets historically have, its possible this may look like a little blip in the future. I also recommend rebalancing or adding to their portfolio at this time to take advantage of the ‘on sale’ prices. We never know where the bottom is, but history tells us that we are close.”
Reset Your Perspective: Markets have bounced back no matter how negative they were during a bear market. If you remain disciplined in a negative market, you may be able to avoid common difficulties. The longer you stay invested, the higher chances you will achieve your goals.
Don’t do it alone: A financial advisor can help you revise your financial approach and offer investment insights. A financial advisor can continue to help you stay on track after markets recover as your priorities may change.
No investment strategy can guarantee a profit or protect against a loss. Past performance is not a guarantee of future results. The Standard & Poor’s 500 is an unmanaged index generally representative of the U.S. Stock Market and cannot be investment in directly.
There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. Diversification does not protect against a risk; it is a method used to help manage portfolio volatility. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends.
Brian Drane is a CFR vice president at Central Bank/Central Trust.