On Monday, June 13, the S&P 500 ended 3.9 percent lower, nearly 22 percent from its high in January, officially entering the U.S. into a bear market. Over three weeks ago, stocks took a dive, closing in on a bear market. A last-minute turnaround of the market pulled stocks back up, narrowly avoiding what has now become inevitable.
Although news of a bear market sounds scary to most, the last time we were in a bear market wasn’t so long ago. It occurred in early 2020 and was the shortest on record. Within six months, the market was back up. And by March 2021, we had entered a bull market.
You might be thinking, I don’t live in the United States or invest in any U.S stocks, how does this affect me? The reality is that as the U.S enters into a bear market, its effects cause a ripple onto the global economy.
What exactly are the bull and bear markets?
A bull market is when stock prices rise by 20 percent after two declines of 20 percent each, and a bear market is declared when stock prices have fallen 20 percent or more from a recent high for a sustained period.
Markets have been up and down throughout history, but if we zoom out, we can see that the market has always recovered over the long run. The most infamous bear market was during the Great Depression. Between September 1929 and June 1932, stocks fell a whopping 84 percent and didn’t fully recover until January 1945. Other common bear markets include the dot-com bubble burst in the early 2000s, which resulted in 8 months of recession, and the global financial crisis of 2008 and 2009, which led to the deepest U.S. recession since World War II.
What caused this bear market?
So you may be asking, why did stocks drop by more than 20 percent? And will the market recover?
Both are excellent questions – let’s try and tackle the first.
An increase in inflation, the conflict in Ukraine, and a slowdown in China’s economy are some of the reasons that have led to the bear market that we are now in. Investors are concerned with the economy and are reconsidering how they should invest their money, which has led to a massive sell-off of stocks and other commodities.
Signals from the Federal Reserve of increased interest rates will make it more expensive to borrow money, carrying the risk of causing a recession if rates are raised too high or too quickly. A poll released Tuesday shows that nearly seven out of ten economists believe there will be a recession in the U.S next year, should inflation rates continue to soar and geopolitical tensions continue to worsen.
If history is proof of anything, it is that the markets always recover and likely come back even stronger. Making it more a question of when, not if, the markets will recover. However, things could get worse before they get better. With rising costs and slowed growth, anything is possible in today’s market.
With this in mind, let’s talk about some things to avoid and some practical steps you can take throughout this bear market.
What shouldn’t you do?
1. Don’t panic
It is normal for markets to fluctuate, and the last thing you want to do as an investor is to make short-term decisions that will affect your long-term gains.
2. Don’t sell your investments unless absolutely necessary
Seeing negative returns in your investment portfolio can be daunting. No one likes to see that they have lost money. However, the key thing to remember is that your losses are not crystalized unless you actually sell your investments. There would only be two reasons why you should sell your investments: one, you are in need of the money, and two, you no longer believe that your investment will perform well long-term.
3. Don’t stop investing (if you can afford to continue investing)
As stock prices fall, it may seem logical to stop investing but by doing this, you could potentially miss out on investing in the same assets at a cheaper price. Remember, time in the market beats timing the market. And if you come out on the other end, you will have taken advantage of that growth.
What should you do?
1. Diversify your investments
In times of market downfall, it’s more important than ever to diversify your investments. Having a portfolio spread across a range of assets, markets, industries, and company size is an excellent way to mitigate your risk.
Let me give you an example of why you need diversification: if you had invested all of your money in the tourism and hospitality industries during the market decline in 2020, you would have lost a big chunk of your portfolio. But if you had also invested in technology and healthcare, your portfolio wouldn’t have suffered so greatly (and may have even grown). The growth from some of your investments will offset losses from other investments in your portfolio.
2. Rebalance your portfolio
An important part of managing your investments is to rebalance your portfolio in line with your risk tolerance. Having too much invested in one type of asset could lead to taking on too much risk. Rebalancing could also mean adjusting the weightage of holdings in your portfolio to meet a level of diversification that you are comfortable with, as industries fluctuate. The general rule is to take on less risk as you get older, as you have less time for your portfolio to recover. The same rule applies if you have a shorter time horizon.
3. Lower your expenses and increase your income
In times of uncertainty (and possible recession), it is vital to ensure you are able to cover your costs. Start by lowering your outgoings and if you aren’t able to do that, try increasing your income (negotiating a raise, starting a side hustle, etc.).
4. Start (or continue) to dollar cost average
It is virtually impossible to time the market. Attempting to buy only at the bottom or sell only at the top of the market is an impractical approach to investing. Investing consistently throughout the market highs and lows will allow you to purchase shares at an average price, reducing the need to try and time the market. Keeping some funds available for potential investment opportunities is another great strategy.
Stick to your investment plan
When it comes to experiencing the rollercoaster of emotions of investing, you’re not alone. It is important to maintain a rational mindset in order to be a successful investor. Remind yourself why you are investing in the first place and stick to your investment plan. A good habit is to also stay up-to-date with what’s happening in the market and remember that whatever is happening is short-term. If you have made any investment mistakes in the past, don’t fret. Learning from your mistakes is the best way to grow as a person and as an investor.Not investment advice.
This content is for informational purposes only and does not represent legal, tax, investment, financial, or other advice.