How to react to a bear market?
So far, 2022 has not been a good year for investors. In fact, we are heading into a bear market. What should you know about bear markets? And how to answer?
For starters, a bear market occurs when a stock index, such as the S&P 500, drops at least 20% from its most recent peak. You might think that this type of fall is rare, but it really isn’t. Historically, bear markets have occurred every few years and are a normal feature of the investment landscape. We experienced a bear market quite recently, from mid-February 2020 to the end of March of the same year.
What causes bear markets? Everyone 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 issues.
When will financial markets start moving in the right direction again? Nobody 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 difficult to view your investment statements these days. But you will help yourself by taking a long-term view. Consider this: From March 2009 to the end of 2021, the Dow Jones Industrial Average has gained over 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 that 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 trouble coping with investment losses — even if they’re just “losses on paper” for now — you might want to review your risk tolerance and see if it is still the same as when you started investing. Even without a bear market, people’s risk tolerance can change, especially as they approach retirement.
Review your goals. A bear market isn’t meaningless, but by itself it shouldn’t cause you to change your long-term goals. And if your goals haven’t changed, your investment strategy shouldn’t change either.
Look for buying opportunities. During a bear market, you can find quality investments at attractive prices. You could therefore take the opportunity to fill gaps in your portfolio or add shares of investments that you already hold and which, in your opinion, have good growth prospects.
Acquire help. When trying to navigate a long market downturn, it can be helpful to get help and advice. Consider this: Among investors who work with a financial advisor, 84% said it gave them a greater sense of comfort about their finances during the COVID-19 pandemic, according to a 2020 survey by Age Wave and Edward Jones. And getting professional help can provide the same kind of comfort during the current market turmoil.
A bear market is never pleasant. But taking a long-term view and taking action that suits your needs can help you get through this period and look forward to better days.