When stock prices begin falling dramatically, you may become concerned and feel like your only option is to sell in order to limit losses. Experts disagree. As a long-term investor, the difference between success and failure may be determined by your actions during a stock market decline, and selling may reduce rather than raise your chances of success.
Despite numerous pullbacks along the way, the Dow has had an average annual return of 9.9 percent since 1900, including dividends. Instead of worrying about the timing of the next bear market, prepare your portfolio today with an appropriate mix of quality investments so that you can stay invested in both bear and bull markets over time.
Bull and bear markets have hit the Dow since 1946, and bear markets are shorter than bull markets. On average, bear markets last about 15 months with an average loss of about 32 percent. Bull markets, on average, last nearly five years (54 months) with an average gain of about 130 percent. Bear markets eventually come to an end, which is one reason why we recommend that you stay calm.
Bear markets are usually frightening. The stock market decline can be dramatic, and it seems like there’s no end in sight, and you’ll hear lots of predictions about how much lower stocks could go. In every bear market, the rebound occurs unexpectedly, usually when the outlook appeared bleak.
While it may be more difficult in bear markets, try to stay calm and ignore extreme predictions of doom and gloom.
During and immediately after market declines, there’s temptation to sell quality stock and bond investments in hopes of avoiding further declines. Commodities, investments promising to “hedge” market risk and other alternatives will become popular after poor stock market performance.
Avoid jumping into or out of the stock market. Instead, investing is about time in the market rather than timing the market. By trying to time the market, you risk missing out on some of the best days, weeks and months.
Buying investments when you have the money available and staying invested gives you the best potential to achieve success. Many also will argue that if you had missed just a handful of the worst days, returns would have been just as good.
This might be true, but predicting the worst days is just as difficult as predicting the best ones, and they frequently occur near each other. Staying invested can help ensure you don’t experience the worst while missing the best.
Bear markets provide long-term investors with the opportunity to buy quality investments at a lower price. The price you pay for an investment matters. Why? Generally, the lower the price you pay for a quality investment, the higher your potential investment return over time.
This advice also holds true for market dips and corrections. Rebalancing your portfolio back to its target mix of investments (also called your asset allocation) is a way to use bear markets to your advantage.
If you’re taking income from your investments, it’s still possible to use a bear market to your advantage by rebalancing to help reduce its impact. While it can be difficult, consider temporarily reducing your income slightly by delaying spending so that you leave more invested while prices are low. That can help your investments recover during the following rebound.
We’re not predicting when a bear market will occur. However, by owning quality investments in appropriate amounts and diversifying them, you can be better prepared to weather periodic bear markets regardless of when they may occur.
Vincent Renda is an investment specialist with Edward Jones in Sunnyside.