A bear market is a prolonged period of price declines in securities, an index such as the S&P 500, or the overall stock market of usually 20% or more from a recent high. Bear markets can also signal economic downturns such as a pandemic, recession, or geopolitical crisis and may be cyclical or longer-term. Pessimism and overall negative investor sentiment may occur during a bear market, often leading to heard behavior, hasty decisions, and fear selling. These can be a risk to a portfolio's overall long-term performance.
As uncomfortable as a bear market may be, understanding how your emotions impact your portfolio's performance is critical. Here are eight tips for helping you survive a bear market:
- Turn off the noise. Thanks to the media, we live in an interconnected world and always know what is happening in the world's markets. While some information sources provide accurate market information, others may not reflect the current market conditions. Limit your exposure to stock market media reporting and rely on your advisor to inform you of what you need to know. Or, ask questions as to how your portfolio and goals may impact by a bear market.
- Live your life. It may be unhealthy for you to follow the market's performance 24/7 or let it consume you. Also, it is essential to understand that your portfolio does not define who you are or how successful you are.
- Understand basis point performance reporting. The relationship between percentage changes and basis points determines a difference in a financial instrument, such as the stock market. The Basis Point (BPS) is used to calculate changes in interest rates, equity indexes (stock market), and fixed-income securities yield.
A basis point is 1/100th of 1%. For example, the Dow ‘falling’ 400 points would be a 4% decline at the market close. Remember there are 20-22 trading days each month, and reacting to a bear market based on one day's performance may be a premature decision.
- Understand investment risk. It is essential to investigate the strategies in your portfolio to determine how they pay out dividends and if the payout is reliable during a bear market. Other considerations to consider:
- Keeping cash in a portfolio during a bear market can create other risks such as inflation and time-horizon risks.
- Taking more investment risk during a bear market can reap higher returns when the markets start to recover.
- Examine your portfolio's strategies. Investing in foreign or emerging markets or different sectors may provide positive returns and recover ahead of domestic markets or other sectors as a bear market shifts toward becoming a bull market.
- Stick to the (financial) plan. During a bear market, stick to your overall investment objectives and focus on portfolio holdings pertaining to your financial plan, not individual holdings.
- Let the markets do their thing. It is important to remember that time in the market beats timing the market. Stay focused on your long-term financial strategy and discuss your concerns about bear market volatility with your financial professional.
- Remember that this bear market, too, will pass. Historically, bear markets tend to be shorter than bull markets. The average length of a bear market is just 289 days or just under ten months. Bull markets can last from a few months to several years, tend to be more frequent than a bear market, and have occurred 78% of the past 91 years.
Are you concerned about this bear market?
Today's bear market presents challenges but also opportunities and potential rewards. Our team can help address your concerns about this bear market and develop strategies that align with your goals and timeline. Contact us today!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Past performance is no guarantee of future results.
Basis Points are a unit relating to interest rates that is equal to 1/100th of a percentage point. It is frequently but not exclusively used to express differences in interest rates of less than 1%.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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