Investing is a long game – but that can be hard to remember when your investments are plummeting. In light of the recent market downturn, some investors are struggling to hold back a sense of panic.
You may have heard the current stock market climate described as a bear market. We’ll explain what that means, and give you some tried-and-true strategies to weather the storm.
What is a Bear Market?
A bear market is when the market has more than a 20% downturn from its recent highs. There is no exact length of time for how long a bear market might last. The longest bear market in history occurred during the Great Depression and lasted between September 1939 and April 1942.
Current investors might remember the shortest bear market in history, which was from February 19, 2020 until March 23, 2020. This was caused by the outbreak of Covid-19.
It’s hard to say exactly what causes a bear market to happen. Market downturns occur because of a variety of factors including global instability, high inflation or general investor pessimism. The current bear market might be caused by high inflation, the Russian invasion of Ukraine, supply-chain problems and the continuation of the Covid-19 pandemic.
During a bear market, investors will usually see steady losses until the market rebounds at some point. A bear market generally occurs between every five and 10 years. It may also indicate the beginning of a recession, but that’s not always the case.
How to handle a bear market
When a bear market occurs, it’s important for investors not to react immediately. Read below to see what you should do during a bear market to minimize any damage to your portfolio.
Whether you’re a new investor or an experienced one, the best advice on how to handle a bear market is simple: keep calm.
Many investors worry during a down market that stocks will keep falling, so they want to cut their losses early and sell before their investments become worthless. Unfortunately, this strategy is what leads to people suffering huge losses and being unable to meet their investment goals later.
What many investors fail to realize is that you haven’t lost anything until you’ve actually sold the securities you own. While you have the money invested, it’s not a loss. It just means your portfolio is currently down.
Some investors are tempted to stop putting money in the stock market during a downturn. They tell themselves that they’ll start buying again once the market has picked back up. But this strategy is also just another example of trying to time the market.
You should always keep investing, even during a bear market. By buying shares when the market is down, you’ll get them at a lower price and be able to afford more shares than normal.
Here’s how that plays out in real life. About six months ago, one share of Vanguard’s total stock index fund (VTSAX) cost $117.67. in the current bear market, that same share costs $96.88. If you invested $500 six months ago, you could have bought 4.25 shares – but now you can buy 5.16 shares.
The only people who need to be concerned about changing their strategy in a down market are those who are close to retiring. If you’re at least five years out from retiring, you likely don’t need to do anything differently.
Consider investing more money
A better way to think of a bear market is like a clearance sale at your favorite store. When there’s a sale, it means you can buy more items for the same amount of money.
Some people choose to take advantage of a bear market and invest more than they would normally. Think of it like stocking up during a buy one, get one free sale.
“If your goals are long-term, you have an investment policy statement, and you’ve got a psychological or behavioral mindset to handle short-term losses, go for it,” said Brent Perry, CFP of Piedmont Financial Advisors.
You should only employ this strategy if you have a stable job and a solid emergency fund. If you have any high-interest debt, like credit cards, you should pay those off before investing more than normal.
Stop checking your portfolio daily
When the market is going well, viewing your investments frequently can feel like you’re making money without doing anything. But when the market is down, looking at your investments too often can create unnecessary fear and anxiety.
You should still check in to make sure that your money is being invested, and that there are no issues. When you do check in, give yourself a time limit to make sure you’re not doomscrolling through your investment accounts.
Get professional help
If you still have a lot of anxiety about your investments, talk to a financial planner who can go over your portfolio and let you know if you’re still on track.
Remember, bear markets are a natural part of the investment cycle. If you look at any investment graph over several decades, you will notice dips every few years. But the market has always rebounded, even after the worst nosedives in history.
You may have heard the current stock market described as a bear market. We’ll explain what that means and how to handle it.