How should you respond to a bear market?
So far, 2022 has not been a good year for investors. In fact, we’re moving into bear market territory. What should you know about bear markets? And how should you respond?
To begin with, a bear market occurs when a stock market index, such as the S&P 500, falls at least 20% from its most recent high point. You might think this type of drop is rare, but that’s not actually the case. Historically, bear markets have occurred every few years and are a normal feature of the investment landscape. We experienced a bear market fairly recently, from mid-February 2020 through late March of that same year.
What causes bear markets? Each one is different, but the current one is largely the result of several factors, including high inflation, rising interest rates, the war in Ukraine and global supply chain problems.
When will the financial markets again start moving in a positive direction? No one can say for sure, but in any case, it’s not really a good idea to make investment decisions based on what may happen next in the financial markets. Instead, consider these moves:
Be patient. It can be challenging to look at your investment statements during these days. But you’ll help yourself by taking a long-term view. Consider this: From March 2009 until the end of 2021, the Dow Jones Industrial Average gained more than 460%. So, if you’ve been investing for a while, compare where you are now to where you were 10 or 12 years ago. You’ve probably made pretty good progress over this time – and 10 years from now, the current downturn may not look like such a big event, either.
Review your risk tolerance. If you’re having a hard time coping with investment losses – even if they’re just “paper losses” for now – you may want to review your tolerance for risk and see if it’s still the same as it was when you began investing. Even without a bear market, people’s risk tolerance can change, especially as they approach retirement.
Review your goals. A bear market is not meaningless, but by itself it shouldn’t cause you to change your long-term goals. And if your goals haven’t changed, neither should your investment strategy.
Look for buying opportunities. During a down market, you can find quality investments at attractive prices. So you could take this opportunity to fill gaps in your portfolio or add shares of investments that you already own and that you believe have good prospects for growth.
Get some help. When trying to navigate a lengthy market downturn, it can be useful to get some support and guidance. Consider this: Among investors who work with a financial adviser, 84% said that doing so gave them a greater sense of comfort about their finances during the COVID-19 pandemic, according to a survey conducted in 2020 by Age Wave and Edward Jones. And getting professional help may provide the same type of reassurance during the current market turmoil.
A bear market is never enjoyable. But taking the long view and making moves appropriate for your needs can help you get through this period and look ahead to better days.