Despite what you may have heard, stocks don’t always go up. Over time, the average gain of the S&P 500 comes out around 8-10% annually, but that doesn’t mean a steady 8% or 10% every year. Sometimes stocks go down—and often with much more rapidity than they had going up. “Stocks take the stairs up, but the elevator down” is one of the oldest sayings in the investment world, and 2020 showed why. Stocks fell more than 30% in just over 6 weeks during the beginning of the coronavirus pandemic, sending the indices into one of the fastest bear markets in history.

In this post, we’ll discuss what is known as a bear market and potential bear market investing strategies. For personalized wealth management and financial planning services, contact Good Life Financial Advisors of Mt. Pleasant, SC today.

What is a Bear Market?

A bear market is when stocks fall 20% or more from all-time highs in a specific time period. Some bear markets only last weeks, while others can drag on for years. Bear markets can occur in specific industries (i.e., a bear market in the travel sector) or they can swallow up entire indices and countries.

Bear markets can happen for a number of different reasons. A shrinking economy, poor corporate profits, political uncertainty, or as we saw this year, an infectious virus coming out of the blue. Bear markets are an inevitable part of the investing experience. After all, if stocks never went down, there would be no risk in buying them and therefore no reward with outsized gains. But this is not the case. All stock investments include risk.

Bear markets shouldn’t be feared, though. In fact, they’re common and often healthy if the market has overheated and valuations have gotten stretched.

How Should You Invest During a Bear Market?

Bear markets can occur at any time, making them unavoidable for any long-term investor. The problem with bear markets is you usually don’t know it’s a bear market until long after it’s begun. Stocks can decline for all types of reasons, and by the time the 20% drop confirms the bear market, it’s too late to adjust your portfolio.

What should you do if a bear market strikes? Always consult with your financial advisor first and see if there are any individually-tailored moves to be made. Not everyone can stomach a plummeting portfolio balance. If your risk tolerance is low, you might panic at the least opportune time. Here are a few strategies to help you get through a bear market:

Don’t Panic. Remember, bear markets are part of investing. Not every bear market signals a depression, and no bull market lasts forever. If stocks decline rapidly, stay away from your account balance screen and focus on your financial plan. Are you properly diversified? Do you have savings that will be unaffected by the downturn? You never want to panic sell your equities. If you give in to your emotions, it will be difficult for you to change your mind and get back in the market when the trend changes.
Get Defensive. Some sectors perform better than others during bear markets and economic slowdowns. Consumer defensive stocks that sell products with little demand elasticity (think food, toiletries, hygiene products) often decline less than other stocks in bear markets. Additionally, high dividend stocks like utilities can be safe havens during downturns. But, as always, no investment is guaranteed.
Prepare Ahead of Time. Part of your financial plan should be a reminder of what to do when your portfolio goes down (or up) sharply. Dollar cost averaging can help take a lot of the emotions out of this process. If you invest the same amount of cash every month, you might lose money in bear markets short-term, but you’ll also still be investing when stocks begin their ascent back up. Also, don’t forget to keep your portfolio in line with your goals. If you want a 60/40 portfolio but have let it slide to 65/35 due to a bull market in stocks, trim your equity holdings. By sticking to your plan, you can better withstand the eventual bear market.
Look for Opportunities. Bear markets don’t last forever and stocks will eventually begin to rise again. Dollar cost averaging can help make sure you take part in the recovery, but more risk tolerant investors can also look for opportunities in beaten down spaces. For example, tech stocks declined with the broader market in March as the pandemic began to take hold. However, many tech companies benefited from lockdowns and closed schools as video conferencing and telework became crucial.

Final Thoughts

Bear markets happen and there’s no way to avoid them. Fortunately, bear markets are usually brief and often offer opportunities to purchase stocks in unfairly punished sectors. How you react to a bear market largely depends on your risk tolerance and market goals. If you have a long investment time horizon, bear markets can generally be ignored. But if you’re concerned about protecting yourself in a downturn, always consult with your financial advisor and make sure your financial plan lines up with your goals and risk tolerance.

The experienced advisors at Good Life can help you with your financial plan and bear market investment strategies. Contact us today to schedule a consultation.

Disclosure

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.