Analyst Insight: How To Survive The Current Bear Market

Analyst Insight: How To Survive The Current Bear Market

And so another domino falls. This Monday, we woke up to the news that, after months of staving off the same fate as its Nasdaq compatriot, the benchmark S&P 500 Index had finally succumbed to the unerring pressure and plunged into a bear market.

In an absolute bloodbath day for the wider markets, the index lost 3.9% on Monday to finally dip more than 20% below the all-time highs reached in early January. Fear and panic have rippled across Wall Street in the wake of this symbolic milestone being reached, and many of you are probably pondering what to do over the coming weeks and months.

Ups and downs are natural for the market as time goes past, but having a plan can still help you maintain the course as we go through such a grizzly period. With that in mind, let’s examine everything we know about the current bear market and look at what you can do in order to ensure you come out the other side financially unscathed — and maybe even in a better position than you entered in.

 

What Is a Bear Market?

A bear market is called when the price of securities falls 20% or more from recent highs amid widespread pessimism and negative investor sentiment. This is different from a market correction, which is a decline of between 10% and 20% for a stock or index.

Right now, two out of the three major U.S. indexes are in a bear market, with the S&P 500 entering one this week and the tech-heavy Nasdaq Composite Index having been in one since March. All that holds back a full-on bear market now is the Dow Jones Industrial Index, which has so far remained in correction territory due to its weighting towards industrial and banking stocks.

 

The History of Bear Markets

Despite the fear and pessimism typically associated with the onset of a bear market, these events are far from anomalies for the market. From the Great Depression up until the end of 2020, there have been 17 bear markets, with nine of these directly preceding a recession.

The last bear market we witnessed took place just two years ago as the onset of COVID-19 saw the S&P 500 slump by 36% in record time. Other notable examples include the Financial Crisis of 2008/2009, where the index plummeted by over 55% following the mortgage lending crisis, and the Dot-Com Bubble, where the widespread adoption of the internet translated into a steep rise then sudden fall in the stock prices of technology companies.

The important thing to note is that after every single one of these bear markets, the stock market recovered beyond the highs previously seen prior to the collapse. On average, a bear market will last roughly 289 days and the market will typically fully recover within two years.

While the short-term may be difficult for some investors, that’s a drop in the ocean when compared to a true long-term investing timeline.

 

Why did the S&P 500 Enter a Bear Market?

A number of factors have conspired to send the S&P 500 into a bear market, all of which will likely come as no real surprise to many of you.

Concerns around rising inflation and, more specifically, how the Fed plans to curtail it have many investors worried that a massive economic slowdown is inevitable. A subsequent rotation away from growth stocks has devalued many companies as shareholders look to anchor their portfolios against any major volatility.

COVID is also still looming large over Wall Street, as recent rolling lockdowns across China have had significant impacts on the global supply chain, sending prices surging.

Finally, the ongoing war in Ukraine has sent costs for food and oil skyrocketing, further deepening the economic hole we find ourselves in.

All of these, combined with the rising fear of an impending recession, have sent the S&P 500 into a tailspin.

 

What Should Long-Term Investors Do To Navigate This Bear Market?

Despite all of this, everything isn’t doom and gloom. There are precautions that every investor can take to ensure they can ride out this difficult period with relative comfort.

First, a bear market is a perfect time to do a full assessment of your current long-term investing thesis. Assess your strategy and, in particular, your risk tolerance. It’s easy to talk about investing for 10 years or more when the market is rising every day. Use this down period to think about your goals, your investing horizon, and how much risk you’re really willing to take.

Second, consider using this down period to fortify your portfolio or even add to it. Rotating into defensive stocks or instant diversification plays such as Berkshire Hathaway (BRK.B) or Markel (MKL) can protect any of those tech-heavy portfolios out there. Bear markets also lead to a certain level of investor panic. Quality companies can end up available at considerably lower prices than they’re potentially worth. This is a fantastic time to make use of a dollar-cost averaging strategy to pick up shares in companies you really believe in for the next 10 years and more.

Finally, remember to zoom out and not get overly caught up in the day-to-day sell-offs you may see from stocks you love. The market will always fluctuate, that’s one of the few certainties of Wall Street. Historically, U.S. markets have always rebounded to reach all-time highs, no matter how long it takes. A bear market shouldn’t totally alter your long-term thesis, so hold tight, stick to your convictions, and come out the other side happy you didn’t panic.

Pádraig BolgerPádraig Bolger

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