Depending on your age, you may have only experienced the bull market of the past nine years, so you might not know what to expect – or how to respond – whenever the next bear market strikes.
Of course, just recently, you’ve witnessed a market correction – a drop of at least 10 percent in the major stock market indices such as the S&P 500.
This sudden plunge made big news and reminded many investors of how volatile the financial markets can be. But a full-fledged bear market usually isn’t identified until the markets are down 20 percent from their recent highs. Plus, bear markets, unlike corrections, tend to linger for a while.
The last “bear” emerged from hibernation in October 2007 and stayed on the prowl until early March 2009. During that time, the S&P 500 declined by about 50 percent. Clearly, investors were not happy – but the market recovered and moved to new heights.
This long and strong run-up may have obliterated your bear market memories, if you ever had them at all. And that’s why you might want to familiarize yourself with some of the bare facts about bear markets:
Bear markets may provide good buying opportunities. When gas is expensive, you may just buy a few gallons at a time – but when the price falls, you’re probably more likely to fill up your tank. The same principle can apply to investing – when stock prices are down, your investment dollars will buy more shares. And the more shares you own, the greater your ability to build wealth once the share price rises. In short, a bear market may provide you with a chance to buy quality investments at good prices.
Bear markets don’t last forever. No one can predict precisely how long bear markets will run, but they’ve typically been much shorter than bull markets. So, while you might not particularly like looking at your investment statement during a decline, you can take some comfort in knowing such downturns are a normal feature of the investment landscape.
Bear markets don’t affect all investments equally. If you only own U.S. stocks, your portfolio may well take a sizable hit during a bear market. But other types of investment vehicles may not be as directly affected – and some may even show positive results. Consequently, you could reduce the bear’s “bite” if you also own a variety of other investments, such as international stocks, bonds, GICs and so on. However, while owning this type of diversified portfolio can help reduce the impact of market volatility, it does not guarantee profits or protect against losses.
A bear market can be challenging. But by making the right moves, such as staying patient, looking for buying opportunities and maintaining a diversified portfolio, you may be able to prevent a market decline from becoming unbearable!
Deborah Leahy is an Investment Advisor with Edward Jones, Member CIPF