When the stock market is down, it feels awful. You may be looking at the market down 20% asking yourself, “what do I do now?”
If this sounds familiar, you are not alone. Market downturns always seem to happen at the wrong time, but every investor will experience bear markets during their lifetime.
For starters, what is a bear market. A bear market is a stock market downturn 20% or more from its previous high. Before the bear market hits, you’ll go through a correction, which is a stock market decline of 10% or more.
If you are going into a bear market without any understanding of market history, you may be up for some surprises. While history doesn’t repeat itself it can give a general idea of what to expect in the future. Since 1928, there have been 26 bear markets, which resulted in 15 recessions. A bear market does not always cause or mean we are going into a recession.
When we are going through a bear market, the media is constantly talking about markets. It is important to avoid some of the tricks the media will play on you. The media loves talking about how many points the market moves in a day. The media loves to compare today to something that happened in the past like “the Great Recession of 2008”. While the media is making these claims there is a good chance that much of the downturn is already behind you.
One of the best ways to weather a bear market is to revisit your investment policy statement (IPS). Your investment policy, risk tolerance profile, or financial plan should outline how much risk you are willing and able to take. After revisiting your investment policy statement, you may realize that you are due for a portfolio rebalance. A portfolio rebalance can involve realigning your stocks, bonds, and cash for example. This may be a good reminder of WHY you are better off as a diversified investor.
Your investment policy statement should also clearly outline WHY you are investing and WHAT you are trying to do.
Tuning out the noise is the hardest part of being a long-term investor. When it is possible you should do your best to tune out the negative news being thrown at you. If friends and family are telling you how good they’re still doing, ask for their statements, and look at past performance. I’ve seen people claim they are getting a certain rate of return, but once I dig through the statements, you see that these claims are far off.
Another temptation during bear markets is timing. During periods of down markets people often are urged or tempted to try and time the market, catch the bottom, or predict the top. Research has shown it’s nearly impossible to consistently time the markets. More importantly, research has shown you don’t need to time the markets to be a successful investor with good long-term returns.
While there is no perfect portfolio. There is likely a strategy that will work best for YOU. The most important investment strategy is having a goal. Your goal may be to retire at 62, spend the first 10 years of retirement traveling the world, all while supporting a cause near and dear to you. Creating a plan, investment policy statement, and risk profile that are aligned with meeting your goals are what is most important, not beating an arbitrary index.
In closing, bear markets are tough. A 20% decline usually happens before you even realize it. By the time it happens the media with continue producing headlines that will cause additional fear. All these things may cause you to feel stressed and create the urge to “do something”. Research has shown the best thing to do is revisit your plan. If you are still on track, the next thing to do is usually nothing.
If you need help navigating a bear market, reach out to a financial advisor. As a financial advisor I want to hear from my clients when they are feeling stressed or concerned. Sometimes a simple phone call can go a long way in keeping your long-term financial plan intact. If you are not currently working with an independent CERTIFIED FINANCIAL PLANNER™, it may be a good time for a second opinion of your unique financial situation. Everyone needs different types of guidance and talking with a CFP® might give you some peace of mind.