What Is a Bear Market?
Why Investing in a Bear Market Can Lead to Prosperity
When it comes to investing, one of the most common phrases heard is “buy low and sell high”. While this may sound like an easy task in theory, it is often difficult to make decisions when faced with a bear market. Just when you think you are buying low, new economic data and news from the Fed causes the market to tumble even further. Plus, your emotions start to get the best of you when you see that your investment account is down 10, 20, or even 30 percent (sometimes even more). That is why is it important to understand what a bear market is, how it historically performs, and what typically happens after a bear market. The more informed you are in all market scenarios, the more equipped you will be to make the best decisions possible.
What Is a Bear Market?
A bear market occurs when there is a prolonged decline in the prices of stocks or other securities. Specifically, the market is considered in bear territory when the S&P 500 Index (or some other broad market index) trades 20% below its previous high. It indicates that the economy is slowing, or perhaps even headed into a recession. During bear markets, companies and industries may suffer from decreased sales and profits, job losses, and higher debt levels. This combination of events can discourage investors (like yourself) from buying stocks as fear increases and confidence in the market plummets. During such a time, investors look for ways to protect their investments as well as take advantage of potential gains. For those who are looking to retire within the next 24 months, a bear market can create significant concern since timing becomes essential.
For most other investors with a long-term horizon, however, bear markets present valuable opportunities for growth. Looking back to 1926 through 2019, the average bear market (when the market goes down) has lasted 1.3 years with an average cumulative loss of -38%. Contrary to that, the average bull market (when the market trends up) has lasted 6.6 years with an average cumulative total return of 339%. Nicholas Roerich, a famous artist and Nobel Peace Price winner, once said, “In times of change, the learners inherit the earth, while the learned find themselves equipped to deal with a world that no longer exists”. Investing during times of economic uncertainty requires patience and insight into future economic trends, foresight which will be rewarded in the long-term.
Embrace the Bear
It is important to remember that bear markets typically don’t last forever and that these periods provide chances for investors to acquire more shares at lower prices. Having a plan in place such as diversifying your portfolio and knowing your risk tolerance can help you make better decisions during such trying economic times as a bear market.
History shows that investments made during bear markets have often been some of the most profitable investments. After the bear market passes, the economy and stock markets typically rebound with incredible speed and vigor. This is often referred to as a “bear market rally.” Do you remember how quickly the market rebounded after the March 2020 lows from the pandemic induced sell-off?
Investors should view bear markets as an opportunity rather than something to fear. By analyzing the data from past bear markets, it can help you determine which industries may suffer the most and which may be the most profitable to invest in. With careful planning and understanding of market trends, you can position yourself to benefit from bear markets.
By embracing rather than avoiding a bear market, investors have historically been able to turn temporary unrealized losses into long-term gains. Bear markets often represent buying opportunities for those with the courage and patience to take advantage of them. By following sound investing strategies, investors can make the most of bear markets and potentially come out ahead in the long run. This is why it is important to understand what a bear market is and why you should not fear them. Instead, embrace the current bear market for all that it offers. Check out funds like VGT (Vanguard Information Technology ETF) and QQQ (Invesco QQQ Trust) that are tech heavy which have been pummeled over the past 12 months.
Warren Buffet once said, “You pay a very high price in the stock market for a cheery consensus”. That means that when the market is doing well and everyone is happily investing, that’s when you are not getting the best deals. Contrary to that, when everyone is concerned about the direction of the economy and people are afraid to buy shares of companies, it is precisely at that moment when you should dollar-cost-average into the market. If you don’t know, dollar cost average means buying shares of a company at different times and prices, or in this scenario, buying shares of companies as often as you can when their share prices are selling at a discount. It helps spread out the risk when investing in the stock market. With all of this in mind, embrace opportunities in volatile economic environments like we are in today; knowledge gained now can lead to increased wealth down the road.
*This is not financial advice. For educational purposes only.