A bull market happens when investors are optimistic about companies’ growth potential and profit outlook, and stock 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 term “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 market 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.
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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 portfolio 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, diversification 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.
Use the Portfolio benchmark calculator to assess the performance of your portfolio in comparison to common benchmarks over various time frames.