If you pay attention to any financial news, you have probably been hearing about a bear market for the last several months. It’s one of latest buzz words used by the media to strike fear in the minds of investors, but what is a bear market? Should you be scared? What should investors do now that it has arrived?
What Is A Bear Market?
A bear market is used to describe a prolonged period of price decline in the stock market. It usually describes a price fall of 20% or more from recent highs. Bear markets can be especially unsettling for investors as they begin to see their accounts go down in value. Fear and panic are strong human emotions, and often lead investors to making bad financial decisions.
Bear markets tend to be shorter, but the pain of the loss has been substantial for most investors.
Here are 5 things you can do now to take advantage of a bear market.
#1: Increase Your Systematic Contributions
If you are a fan of Jim Cramer, you have probably heard him say, “there is always a bull market somewhere.” While the past is no guarantee of what the future holds, we can look back at the history of the stock market, look for patterns and cycles to help us make decisions moving forward.
Increasing contributions to your 401(k) or other investments can help you purchase more shares at a lower price. And we all know the key to investing is ‘buy low, sell high’ right?
#2: Dollar Cost Averaging
If you have some extra cash on the sideline, but are still nervous about the markets, dollar cost averaging could be a great strategy for you. Dollar cost averaging is the process of setting up systematic investing of a fixed dollar amount on a regular basis, regardless of share price. Whether the market is going up or down, this can be a great way to build good investing habits and avoid the temptation of trying to time the market.
#3: Have a Long-Term Vision
If we look back at history, downturns don’t last forever. Studies have found that losses tend to be more painful than gains. It can be easy for investors to get hung up on the short-term downturn and forget about their long-term goals.
#4: Have a Plan
In my opinion, this may be the most important piece of advice. A financial plan can help validate the things you are doing well, identity areas of concern, and develop a strategy to meet your financial goals. During times of uncertainty, a financial plan can help guide you and prevent human emotions from taking over the decision-making process. Should you go to cash? Are you still on track to retire? Is now a good time to make a large purchase? These are all questions that can be easily answered if you have a well crafted financial plan.
#5: Hire a Professional
Financial professionals bring more value than picking the next great investment. In fact, studies from Vanguard and Russell investments show that behavioral coaching is one of the biggest values an advisor can provide to their clients.
Take for example three hypothetical investors’ journeys from January 2020 through December 2021:
Investors who remained in the market for the full time period would have seen a $100 investment rise to $133 (blue line in the chart below).
An investor who moved to cash in March 2020 and then returned to the market a few months later at the end of the second quarter, would only have $107 by the end of 2021 (gray line in the chart below).
An investor who moved to cash in March 2020 and remained in cash for the entire year, then re-entered the market at the beginning of 2021, would have only $94 at the end of 2021 (yellow line in the chart below).
I know these times are not fun. We are all in it together. Personal growth and learning doesn’t happen when there is smooth sailing. Stay positive, and this too shall pass.
Important Information
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss.
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