What is a bear market? Here’s how it affects your wallet
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Bears and bulls are common animal references used in the stock market, but what does an animal have to do with stocks? Think about how each creature attacks its prey – usually the bull raises its horns up, and the bear reaches its head down. And right now your prey (ie your investment portfolio) is under attack in a downtrend.
Last week, the markets came close to reaching bear market status as the S&P 500 Index is 20% off its all-time high. Specifically, a bear market is when the value of the overall stock market drops 20% or more from its recent highs. The peak was reached at Christmas 2021, but quickly fell in 2022 amid a barrage of rising inflation costs, high interest rates and lackluster earnings reports from major companies.
The last bear market occurred two years ago with the onset of the Covid-19 pandemic and before that, in 2009 during the financial crisis. 2011 and 2018 saw pullbacks close to the bear market as well.
So what should you do with your investments, including one in a 401(k) or Roth IRA, during a bear market? Outline the best ways to weather a bear market and how to continue investing in such economically challenging times.
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Bear Markets: What you need to know
Bear markets can be particularly nerve-wracking, as you watch helplessly as your portfolio slowly declines in value. And because humans are emotionally driven, we are more likely to not make the right decisions in response.
“Investors tend to overreact to bad news,” says Scott Nations, president of financial engineering firm NationsShares and author of “Investors tend to overreact to bad news.”The Anxious Investor: Master the Investing Mind Game. “It is a human tendency that is perhaps evolutionary in nature, since a time when not responding could be an existential risk, and overreaction was relatively inexpensive. But our world has changed and we know it is impossible to tell when the market is going, so to sell because the market has gone down and you think the market will go down further is wrong.”
It turns out that there is also a significant amount of data to back up his claims. According to Hartford Funds, there have been 26 bear markets since 1928, and this is likely the number 27. Each of the 26 bear markets is followed by a bull market, providing solid gains to help offset losses. During bear markets, stocks tend to fall by about 36%. During bull markets, stocks tend to rise by about 114%.
While the bad days are easy to remember, keep in mind that there are more good days out there. in the middle, Bear markets last for an average of 289 days, while bull markets can continue to rise for 991 days. Not only that, some of the S&P 500’s strongest days have already occurred during bear markets, so trying to time the market right can be nearly impossible.
Finally, one of the biggest concerns for stock market investors is the idea of a looming recession. By definition, a recession is two consecutive quarters with declining GDP or GDP. In the first quarter of 2022, we saw a 1.4% decline in GDP – and expectations for the second quarter were mixed. However, a downturn in the stock market is not always an indicator of a recession. Of the 17 bear markets from the Great Recession through 2020, only nine were associated with a recession, according to a report from Invesco.
How to invest during a bear market
As a day investor, you can’t do anything about the stock market or the economy as a whole, so focusing on either won’t do you any favors. However, there are still many things you can do today to help manage your investments in such uncertain times.
Keep investing for the long term
We all love to shop when our favorite stores have sales, now you can buy your favorite stocks, exchange-traded funds (also called ETFs) and Index funds down.
Nations says, “If you’re a long-term investor, you should be cheerful.” “You’ll put money into the business now and regularly during that time and get to buy at a discount. Try to change your perspective. Not all investors will be able to, but it’s useful training.”
Consider investment accounts with tax liens
There are many investment accounts that you can buy stocks in, such as a 401(k), a traditional IRA, a Roth IRA, or a health savings account, also called an HSA. It can give you both of these tax incentives that a regular taxable brokerage account cannot. If you’d like to defer taxes until retirement as you would with a 401(k) or invest for tax-deductible gains as you would with a Roth IRA, consider opening one of these accounts.
Also, if you want to get rid of your investments, consider an automated advisor such as Betterment or Wealthfront. Robo advisors create a diversified portfolio for you based on your risk tolerance, age, investment time horizon, and financial goals. Then the software automatically rebalances your investments over time.
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If you want to be a bit of an active investor, consider ETFs
ETFs are groups of individual stocks that track specific indices of companies or sectors. This can be a great tool if you want to avoid picking individual stocks, which can be a high-risk strategy.
Armando Cargi, president of iShares Investment Strategy Americas, says investing in commodities can also be beneficial. “To protect your portfolio from high inflation, we like ETFs with exposure to a wide basket of commodities,” explains Karjee.
However, if you prefer buying and selling shares regularly, consider the tax implications that come with this.
The idea of a bear market coupled with rumors of a possible recession can be frightening to any investor. When you bury money in your retirement accounts, it can be frustrating to see those balances go down.
But as the volatility occurs, keep this in mind: “Despite the market crash, our stock market has gained 8% annually for 125 years,” Nations says. “The key to making money from stocks is not to be afraid of them.”
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Editorial note: The opinions, analyses, reviews or recommendations contained in this article are those of the editorial board alone, and have not been reviewed, approved or otherwise endorsed by any third party.