On June 13 the S&P 500 officially entered a bear market when it closed at 3750, a decline of nearly 22% from its January 3, 2022 high. Since then market volatility has spiked amid uncertainty over the direction of the economy and if the Fed can avoid causing a recession as it combats inflation.
Living through a bear market is difficult and nerve-racking. Below are our top three tips for surviving, and taking advantage of, a bear market.
1. Strategically deploy excess cash
One of the most impactful things investors can do during bear markets is to strategically deploy excess cash. Historically the S&P 500 rallies sharply off of bear market bottoms, and for investors that are able to deploy cash along the way it can lead to significant upside. Since 1957 the S&P 500 has averaged a return of nearly 40% in the 12 months following a bear market trough.
While the market is volatile which can lead many investors to want to sit on the sidelines and “wait it out”, we note that simply getting invested is more important than timing the bottom perfectly. Even if an investor misses the bear bottom by 6 weeks (early or late) the return over the next 12 months is still nearly 20%.
Average 12 month Performance of the S&P 500
2. Avoid selling
Once a bear market occurs investors that didn’t sell will likely benefit in the long-run by remaining invested. The volatility that drives bear market declines also leads to bear market bounces, and the inevitable recovery. Selling near market bottoms will likely lead to missing these strong recoveries and significantly weigh on future performance compounding.
Staying invested matters – missing the best days, especially after surviving the worst, can significantly weigh on long-term returns
For those without excess cash to invest and can’t stomach the volatility we suggest stepping back from watching the market day to day, as this can help avoid irrational decisions to sell near the bottom.
3. Remember that bear markets aren’t always recessions
Markets can experience bear corrections without the economy slowing in a meaningfully way. While the media and press are constantly talking about a recession we note that that current bear market has been driven entirely by multiple contraction in the S&P 500, as earnings estimates have held up.
While this dynamic could change, we note that in the five previous bear markets only three of them resulted in recessions.
Long-term investing requires discipline
Trading and investing are two very different approaches to the market. We are investors, and for our clients we take long-term approaches to wealth generation and growth. Having a plan in place and following it will yield stronger returns for most investors vs. trying to time the market and buy and sell. Instead, as we mentioned in Tip 1, we think that opportunistic buying is the best way to drive increased portfolio returns over the long-run. Staying invested, and having excess cash to strategically deploy when markets dislocate can drive significant upside over the long-run and relies less on timing the market perfectly.
ENDNOTES
Disclosures
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.