If you’ve done any amount of investing, you’re probably familiar with the term bear market. But what exactly does it mean, and how can you keep your investments safe during periods of uncertainty? A market downturn doesn’t mean you have to lose money. To get a little more insight, we spoke with Srinath Desilva with CUSO Financial Services, Amplify Credit Union’s partner financial advisor firm. Here’s what they had to say about surviving a bear market.
What Is a Bear Market?
In layman’s terms, a bear market is a period of prolonged market decline. Bear markets are typically marked by a 20% downturn over a two month (or longer) timeframe. This is the opposite of a bull market, which describes a period where the market is on the rise. Both “bear” and “bull” are most commonly used when talking about the stock market, but it can apply to bonds, currencies, commodities, and real estate as well.
However, it’s important to note that the exact definition of a bear market differs across the industry. Some define it as a period in which investors are less likely to take risks and opt for safer bets.
What Triggers a Bear Market?
So what can cause the market to fall so drastically? Because markets reflect the expectation of future earnings, stock prices often decline whenever investors have reason to believe there won’t be growth. A weak economy with high unemployment and low disposable income will typically cause a bear market. Government intervention, such as changing the federal funds’ interest rate or the tax rate, can also lead to a market drop.
The uncertainty and volatility of bear markets cause investors to sell their stock market shares to prevent further loss. In turn, these falling stock prices can make it more difficult to estimate when the market will bottom. This uncertainty can adversely affect corporate dividends which can lower dividends.
Bear markets can also be either secular or cyclical. Secular markets can last years, whereas the trends of a short term cyclical market only last a few weeks or months.
Too serious a subject matter? Then here’s a fun fact: analysts use the phrase ‘bear market’ because these downward trends resemble the way bears attack their prey. Bears typically swipe their paws down, much like the direction of prices in a bear market.
What You Should Do in a Bear Market
When the market falls, the value of your investments drop. This amount can be significant. For example, in the 2008 financial crisis, indexes like the Dow Jones Industrial Average and the S&P 500 took substantial hits. By March of 2009, the Dow sat below 50% of where it was at in 2007.
Market drops are inevitable, and how you react will determine how hard your investment portfolio is hit when it is all over. Here are a few steps you can take to come out ahead after a bear market.
Talk to Your Advisor
First and foremost, it’s essential to meet with your financial advisor to discuss your concerns before taking any action. If you’re wondering what questions you should be asking your financial advisor right now, Desilva offers these five starters:
- How can I take advantage of the market volatility?
- Have you experienced this kind of volatility before, and if so, what was the outcome?
- Is my portfolio properly diversified?
- Is my portfolio aligned with my risk tolerance? Am I as risky as I think I am?
- Can you run a financial plan to see how this has impacted my long-term goals?
By getting the answers to these questions, you will better understand the next steps you should take with your investment plan.
Investing During a Bear Market
If you’re new to investing and looking for buying opportunities while the market is down, Desilva had two tips to offer. “Consult with a Financial Advisor to see if you are eligible for a Roth IRA,” he suggests. “The investment options are numerous, and the earnings grow tax-free forever.”
As counter-intuitive as it may be, there are often opportunities in bear markets that would not exist elsewhere. “It is best to dollar-cost-average when buying in this market environment.”
Dollar-cost averaging will help you reduce the effects of market volatility. Instead of purchasing stocks all at once, you spread out the purchases at regular intervals and in similar amounts. This approach ensures that you don’t go all-in at a high market point.
If you are worried about future downturns, it may be best to diversify your investment accounts and savings. “It’s important not to put all of your eggs in one basket,” Desilva adds, “but there is no one-size-fits-all answer. Meet with a financial advisor to come up with a comprehensive financial plan that meets your risk tolerance and time horizon.”
Protecting Your Retirement Savings and 401(k)
Bear markets can also be a real nail-biter for those with retirement savings and 401(k)s. Because 401(k)s and other plans involve investing your retirement money in stocks and bonds, when the market goes down, so does the value of your savings. This volatility can make you feel uncertain about your future financial security, especially if you are near retirement.
Desilva gives these three pieces of advice:
- If you’re able, increase your contributions
- Invest in a diversified portfolio consisting mainly of stocks
- Know your short-term options - consider an appointment with an advisor who may be able to provide additional strategies for funding in the short term.
For those who are in a financial position to invest, a bear market can lead to new opportunities. If you buy when the market is declining, when prices start rising, you’ll be in a good position.
Above all else, don’t be tempted to cash out or make early withdrawals. Not only will you now have a realized loss, but you may be subject to a 10% penalty (if you are younger than 59.5 years) and owe taxes. When it comes to the market, remember: while past performance is no guarantee of the future, what goes down has historically rebounded and eventually come back up.
Whether you have your retirement money sitting in a 401(k) or have spare change invested in a few stocks, the term bear market likely fills you with dread. But in periods of economic downturn, it’s important to remember two things: don’t panic and don’t try to tackle your problems alone. A financial advisor can help you make smart investment decisions that will help you prudently manage your money and help you survive a bear market.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.