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How to Handle a Bear Market

The stock market seems like it’s in a free fall. Understanding a few key bear market facts can calm your nerves, and help you avoid costly mistakes.

Written by Carla Fried / July 25, 2022

Quick Bites

  • Periods when stocks fall at least 20% are no one’s idea of fun, but they are normal.
  • Even accounting for five bear markets in the past 35 years, stocks have an annualized gain of 10%.
  • The best move to make in a bear market? Sit tight and be patient.

Nerve-wracking seems an apt description for the stock market lately. We seem to be going through a period of pretty wild swings.

2022 began with the Fed signaling rising interest rates—a report which impacted the markets almost immediately, with the Nasdaq falling 3.1% and the S&P 500 dropping 1.9%. Things did not improve. The markets went on to have their worst first half in decades, with the midpoint of 2022 seeing the Nasdaq down by 30%, the S&P down by 20%, and the Dow Jones Industrial Index down by 15%.

While it’s perfectly reasonable to get stressed when you see your 401(k) and IRA balances falling, your long-term success hinges on how well you process that feeling.

“Fear-based decisions are often the exact opposite of what investors should do," says Beau Henderson, founder of RichLife Advisors. He suggests education is a potent remedy. “If you take time to understand what you’re fearful of, it becomes easier and more clear on how to stay on track with your goals.”

In that spirit, here’s a guide that can help you learn to appreciate that bear markets are just part of the process to reach your long-term investing goals.

Inside this article

  1. Be patient
  2. Resist the urge to sell
  3. Look for opportunities
  4. Focus on your end goal

Think of bear markets as an investing feature not a bug

A bear market is when the value of a stock market index, such as the S&P 500 stock index, drops at least 20%.

Since 1946 there have been 13 bear markets according to Sam Stovall, chief investment strategist at research firm CFRA. The average bear-market decline is 33% and the descent from high to low typically lasts 17 months. Then there’s the healing period: On average it’s taken slightly more than two years after the low point for stocks to regain what they’ve lost.

Granted, a three- to four-year stretch—on average—just to get back to where you were before the fall requires patience. But even if you’re in your 60s, you still have plenty of time, with the average life expectancy being more than 85 years.

“Over decades, the trend line for stocks goes up,” notes Kristen McKenna, managing director at Darrow Wealth Management. “It’s only when you look at shorter periods that you see wild fluctuations. That all gets smoothed out the farther you look.”

Indeed, from 1946 to 2022, a stretch where the S&P 500 endured those 13 bear markets and numerous more corrections—declines between 10% and 20%—the index rose an annualized average of more than 11%.[1]

Granted, 75+ years takes the long-term argument a bit far. How about looking at the past 35 years? During that stretch there have been five bear markets, including the most painful one in (fairly) recent history: the 57% decline between October 2007 and March 2009. Even so, the average annualized return over that stretch is more than 10%.[2]

Resist the urge to sell stocks in a bear market

Our fight-or-flight instinct can make fleeing bear markets seem incredibly logical.

But this is where you want to push yourself to overcome the emotional urge to sell stocks when they are falling.

“You don’t know the one day or the one week where there are going to be significant returns in the whole cycle,” says Henderson. “You have to be invested so you don’t miss those opportunities.”

Henderson isn’t exaggerating. Missing just a few days or weeks here or there can extract a huge cost.

Over the past 20 years, the S&P 500 had an average annualized gain of 9.52%. But if the 10 best days during that 20 years are pulled out of the equation, the average annualized gain was 5.33% according to analysis by JP Morgan Asset Management.[3] If the 30 best days were missed during that 20 years, the average return was 0.43%.

Moreover, those good days tend to happen right in the midst of the awfulness. In that 20-year period, seven of the 10 best days occurred within two weeks of the 10 worst days.

Reframe bear markets as opportunities

If you have years to go until you need to use the money you’ve got invested, you might consider bear markets as the investing equivalent of Black Fridays.

“It’s funny how the stock market is the only place where people don’t like a sale,” says McKenna.

And that’s essentially what bear markets serve up to investors willing to keep adding to their portfolios: the opportunity to buy shares of the same mutual funds and ETFs you were investing in prior to the bear market, but at a lower share price.

With patience, those “sale” shares bought during a market decline will then rise in value over time. (Remember the long-term upward trend for stocks, even accounting for bear markets.)

If you are saving in a workplace 401(k), your auto-investments with each paycheck ensure you will take advantage of the opportunity to buy more shares of stock funds when the price is lower.

If you’re saving on your own in an IRA, setting up automatic investments today from your checking account into your IRA on a schedule—say monthly, or quarterly—is how you can avoid the temptation to stop making contributions in the heat of a bear market.

When a bear strikes, focus on your end goal

Jack Bogle, founder of Vanguard and the first index mutual fund, often counseled during market drama, “Don’t do something. Just stand there.”[4]

The aforementioned data on how dangerous it is to try and jump in and out of the market makes his case. But those are just facts; there are our emotions to consider, too.

In times of market-induced stress, one way to resist the temptation to “do something” is to calmly remind yourself why you are investing and how your asset allocation—your mix of stocks and bonds—addresses both your appetite for risk and your desire to meet long-term goals.

That becomes easy to do once you have taken the time to spell out exactly what your investment plan is.

No investment plan? Or not confident you’ve got the right strategy? Chances are the website for your 401(k) or the website of the discount brokerage for your IRA have articles and tools to help you think through your asset allocation strategy.

And if having a professional review your personal situation would deliver the confidence you need to sit tight through bear markets, there are financial planners who will work on an hourly or project basis (you can search at Garrett Planning Network and XY Planning Network).

McKenna suggests the time to do your strategy review is “when there is nothing to worry about, not when the sky is falling.” Then when a bear market does take hold, you can remind yourself about your long-term strategy, and that there’s nothing you need to do but be patient.

Article Sources
  1. “Stock Market Returns Since 1946,” Official Data Foundation, https://www.officialdata.org/us/stocks/s-p-500/1946?amount=100&endYear=2022.
  2. “Stock Market Returns Since 1987,” Official Data Foundation, https://www.officialdata.org/us/stocks/s-p-500/1987?amount=100&endYear=2022.
  3. “Retirement Insights,” JP Morgan Asset Management, https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/retirement-insights/guide-to-retirement-us.pdf.
  4. “Jack Bogle Interview,” CFA Institute, https://info.cfainstitute.org/rs/357-TRH-938/images/JOHN%20C.%20BOGLE%20-%20Founder%20and%20Former%20CEO%2C%20The%20Vanguard%20Group.pdf.

About the Author

Carla Fried

Carla Fried

Carla is an expert on retirement planning and behavioral finance with over 20 years’ experience in personal finance journalism. Her work has been published in Bloomberg, CNBC, Consumer Reports, Money, The New York Times, and other journalism brands.

Full bio

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