What to know about bear markets
Joel Dresang: Steve, by various measures we’re in the longest running bull market for stocks ever. So, let’s talk about bear markets. What should investors know about those? Let’s start with a definition. What is a bear market?
Steve Giles: Joel, a bear market is generally when stock prices are falling. Technically, a bear market occurs when we have 20% decline in either the S&P 500 or the Dow Jones. Now, we’ve had nine major bear markets since 1926, and on average you get a 10% correction about once every year and a half. So, sell-offs happen quite regularly.
Joel: What do bear markets do to investors?
Steve: Well Joel, they spook investors. Consider that the average decline during those nine bear markets was over 40%. And, the most recent bear market – from October of 2007 to March of 2009 – saw a decline in stock prices of more 50%.
I think it’s important for investors, though, to not be afraid. One thing that is concerning for investors when they see their portfolio going down is losing that money. But if they don’t act on that fear, and if they don’t sell their stocks, then they’re not going to lose anything.
Joel: Fear is a natural instinct, how can investors muster the discipline to not act on fear when those stocks are selling off?
Steve: One word, Joel: Diversification. Diversification is very important when we enter into periods of market volatility, and you want to have a plan. By having a plan, you’re able to withstand any kind of volatility the market may throw at you and not be spooked by those downturns that occur in stocks.
Joel: So generally, investors shouldn’t be selling stocks when the prices are going down, but what about investors who are retired and need money out of their portfolio?
Steve: That’s where diversification comes in. I think it’s important for investors to make sure they have another asset class in addition to stocks, like bonds, that provides diversification during periods of market volatility.
Now, every bear market is different, Joel. Past results are certainly not a guarantee of future returns. But when you look at the last few bear markets, you want to make sure you’ve got enough money set aside in something safer to withstand any kind of protracted sell-off.
Consider, for example, a 60%-stock/40%-bond portfolio and a 4% annual withdrawal rate. That investor would have had enough money set aside to meet their withdrawals for 10 years, that’s 120 months, more than enough to get through any period of market sell-off.
And that’s going to give them the confidence to get through any kind of protracted downturn, and they’re not going to be forced to sell.
Joel: How do we know when we’re in a bear market?
Steve: Technically, Joel, we won’t know we’re in a bear market until we’re actually in a bear market. But that again is why it’s important to have a plan.
I think investors that have a well-balanced portfolio, one that’s well-diversified between stocks and bonds, can withstand any kind of protracted market sell-off. As much as we don’t like seeing our portfolios go down in value, as much as the volatility can be somewhat fearful, having that money in bonds, having money in something that’s not stocks, can certainly be comforting for investors during those periods of heightened volatility.
Corrections: A normal part of investing, a Money Talk Video with Marc Amateis
Total return: Your full investment picture, a Money Talk Video with Paige Radke
Risk: How much can you stand? How much do you need?, a Money Talk Video with Isabelle Wiemero
Rebalancing: More investing, less emotion, a Money Talk Video with Steve Giles
When Should I …rebalance my portfolio? by Art Rothschild
Talking Money: The importance of balance, a Money Talk Video
Beginners Guide to Asset Allocation, Diversification and Rebalancing, from the U.S. Securities and Exchange Commission
Rebalancing Your Portfolio, from the Financial Industry Regulatory Authority
(initially posted November 6, 2018)