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Written by: Peter Mastrantuono
Plunging oil prices and the continuing spread of coronavirus sent stocks into a tailspin on Monday, leaving stocks on the border of bear market territory and investors wondering what comes next.
Market corrections (i.e., declines of 10-19.99%) and bear markets (declines of 20% or more) are an expected and inherent part of stock investing as prices reset from bull markets that may have gotten too extended. In reality, they can be very frightening when living through them.
Anatomy of a Bear Market
Bear markets are not unusual; there have been 26 bear markets as measured by the S&P 500 Index since 1928. They tend not to last very long, but the recovery periods will vary. For instance, it took 23 months to recover from the 1987 crash, five years to recover from the 2000 bear market and eight months to fully rebound from the 1990 bust. The 2008-2009 bear market took six years to recover from. The latest bear market in December 2018 did not last long, as markets reached new highs by the following February.
Keys to Surviving a Bear Market
There are a number of things you can do to ride out down markets, including:
Don’t try to time the market. Predicting the bottom of the market is all but impossible, even for market experts. Consequently, investors who get out of stocks during a bear market may miss the opportunity to recover their losses. A survey by Fidelity of its 401(k) participants showed that individuals who sold all their stock investments during the peak of the 2008-2009 turmoil and jumped back in had a 6.1% higher account balance by March of 2010, compared to a nearly 22% higher account balance for those who stayed fully invested.
Maintain perspective. Don’t allow emotions to rule your investment decisions. Remember why you chose your asset allocation. It was to accomplish long-term goals, recognizing that markets will fluctuate. Remind yourself of those goals and why you’re invested the way you are.
Another way to stay emotionally balanced is by regularly asking yourself a simple question, “Do I believe the U.S. economy will be bigger in five years than it is today?” If you have faith in the country’s long-term economic growth potential, then holding stocks remains the primary means to profit from that future growth.
Reconsider cash holdings. If you need access to cash over the short-term, the stock market is not the place to hold those funds. Having an adequate level of liquid assets to fund short-term cash needs will help reduce the anxiety that comes with sharp stock market declines.
Evaluate income strategy. If you’re a retiree, or close to retirement, you may want to rethink your plans for generating income to fund retirement spending. Relying on stock sales to generate income works in bull markets, but it can be highly destructive in a market correction or bear market. Think about alternative ways to generate retirement cash flow that don’t depend on the proceeds of stock sales. Maintaining two years’ living expenses in a cash position is an additional way to protect against the risk of selling stocks in a falling market.
These are difficult times, but not the end of times. Working with an experienced financial advisor can be instrumental in avoiding the bad behaviors that derail so many investors during difficult market periods, as well as better preparing you for the next bear market.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.