How to better handle a bear market
While day-to-day market volatility is a fact of life, there are periods when stock prices stay higher or lower for longer – these are known as bull and bear markets.
A bull happens when investors are optimistic about companies’ growth potential and profit outlook, and stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition prices generally rise for an extended period of time until hitting a peak – the opposite is a bear, where investors turn pessimistic and stock prices generally decline for an extended period of time, before hitting bottom.
Bear markets can last for months – even years – and see stock prices fall by 20% or more. Visit our Interactive Investing Chart to see the market trends in Canada since 1935.
The trouble is, while they’re frequent, it’s hard to predict where the next bear is hiding because each one is so different. It could be that investors suddenly decide that stock prices are too high and aren’t supported by economic reality – Alan Greenspan once famously used the termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition “irrational exuberance” to describe the Internet Bubble from 1995-2001. In this case, investors’ outsized enthusiasm for new technology stocks was followed by a three-year bear marketBear market A weak market where stock prices fall and investor confidence fades. Often happens when an economy is in recession and unemployment is high, with rising prices.+ read full definition that saw the S&P 500 decline by nearly 50%.
One of the more memorable recent major bear markets followed the 2008 Financial Crisis. It lasted 17 months and saw the S&P 500 drop by 56%. That bear was triggered by risky borrowing which lead to the collapse or near- collapse of some of the most established financial institutions in the U.S.
5 tips to help handle a bear market
While it’s tough to see a bear market coming, the big question for investors — what can you do to help better respond to a bear market? Try starting with these 5 things:
- Keep focused on the long-term – As we said at the beginning, the market goes up and down all the time – it’s a normal part of the cycle. If you are saving for a long-term goal in a well-diversified portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition that meets your needs, then you might be better off tuning out the noise and letting the cycle run its course.
- Be diversified – Making sure your portfolio is diversified – in other words, it contains a mix of stocks, bonds, cash and other investments that behave differently in market cycles. While a bear market can still affect your investments, diversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition can help dampen the effects of a market downturn.
- Stay calm – When markets are falling it’s best to avoid selling out of fear – by selling when the market is on its way down, you can lock in your losses.
- Consider getting advice – If you are not a knowledgeable investor, a registered advisor can help you choose your investments and manage your portfolio so that it can weather different kinds of markets. They can also be there to help you avoid making rash decisions during a downturn – like selling at the bottom when you don’t have to.
- Revisit your risk tolerance – If the prospect of a bear market is keeping you up at night, consider that you might need to adjust your risk tolerance. If you work with an advisor, you should do this annually anyway – and if you’re approaching a big goal where you will need to draw on your investments (i.e., retirement), then you might want to talk about rebalancing your portfolio to avoid a major loss at the wrong time.
If you have a question about investments and want to get unbiased advice, you can visit our Re: Investing website to submit your question.
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