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Bears and bulls are common animal references used within the stock market, but what exactly does an animal have to do with stocks? Think about how each creature attacks its prey — a bull will typically raise its horns upward, while a bear will reach its head downward. And right now, the prey (ie. your investment portfolio) is being attacked in a downward motion.
Last week, the markets came close to reaching bear market status as the S&P 500 index was down 20% from its high. Specifically, a bear market is when the overall stock market drops in value by 20% or more from its recent highs. The high was reached around Christmas of 2021 but quickly dipped in 2022 amid a barrage of rising inflation costs, higher interest rates and lackluster earning reports from major companies.
The last bear market happened two years ago at the start of the Covid-19 pandemic and before that, in 2009 during the financial crisis. 2011 and 2018 saw near bear market pullbacks as well.
So what should you do with your investments, including one in a 401(k) or Roth IRA, during a bear market? Select details the best ways to bear the bear market and how to continue investing in such economically challenging times.
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Bear markets: What you need to know
Bear markets can be particularly nerve-racking, as you watch helplessly while your portfolio slowly declines in value. And because human beings are emotionally driven, we’re more likely to not make the right decisions in response.
“Investors tend to overreact to bad news,” says Scott Nations, president of the financial engineer firm NationsShares and author of “The Anxious Investor: Mastering the Mental Game of Investing.” “It’s a human tendency that is probably evolutionary in nature, from a time when not reacting could be an existential risk and overreacting had relatively little cost. But our world has changed and we know it’s impossible to time the market, so selling because the market has dropped and you think the market is going to fall further is a mistake.”
It turns out there is also a significant amount of data to back his claims. According to Hartford Funds, there have been 26 bear markets since 1928, with this one possibly marking number 27. Each of the 26 bear markets has been followed by a bull market, providing solid gains to help make up for losses. During bear markets, stocks tend to drop by roughly 36%. During bull markets, stocks tend to rise by about 114%.
While the bad days are easier to remember, keep in mind that there are even more good days. on average, bear markets last an average of 289 days, while bull markets can run upwards of 991 days. Not only that, some of the strongest days of the S&P 500 index have actually occurred during bear markets, so trying to time the market right can be nearly impossible.
Lastly, one of the biggest fears of stock market investors is the idea of a looming recession. By definition, a recession is two consecutive quarters with falling gross domestic product, or GDP. In the first quarter of 2022, we saw a 1.4% pullback of GDP — predictions for the second quarter are mixed. That said, a pullback in the stock market is not always an indicator of a recession. Of the 17 bear markets from the Great Depression through 2020, only nine of them were coupled with a recession, according to a report by Invesco.
How to invest during a bear market
As an everyday investor, there is nothing you can do about either the stock market or the economy as a whole, so stressing out about either one won’t just you any positive results. However, there are still several things you can do today to help manage your investments in such precarious times.
Keep investing for the long term
We all love shopping when our favorite stores run sales, and right now, you can buy your favorite stocks, exchanged-traded funds (also called ETFs) and index funds for less.
“If you’re a long-term investor, you should be rejoicing,” Nations says. “You’re going to put money to work now and regularly during that period and you get to buy at a discount. Try changing your point of view. Not all investors will be able to but it’s a useful exercise.”
Consider tax-advanced investing accounts
There are several investing accounts you can buy stocks within, such as a 401(k), a traditional IRA, a Roth IRA or a Health Savings Account, also called an HSA. Each of these can provide you with tax incentives that a regular taxable brokerage account cannot. If you wish to defer taxes until retirement as you would with a 401(k) or invest for tax-free gains as you would with a Roth IRA, consider opening one of these accounts.
Also, if you want to be hands off with your investments, consider a robo-advisor like Betterment or Wealthfront. Robo-advisors create a diversified portfolio for you based off your risk tolerance, age, investment time horizon and financial goals. Then the program automatically rebalances your investments over time.
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If you want to be a slightly active investor, consider ETFs
ETFs are groups of individual stocks that track specific indexes of companies or sectors. These can be a great tool if you want to avoid picking individual stocks, which can be a high-risk strategy.
Armando Cargi, Head of iShares Investment Strategy Americas, says investing in commodities could also be helpful. “To insulate your portfolio against elevated inflation, we like ETFs with exposure to a broad basket of commodities,” Cargi explains.
If, however, you prefer to regularly buy and sell shares, consider the tax implications that go with it.
The idea of a bear market coupled with rumors of a potential recession can be scary for any investor. As you bury money in your retirement accounts, it can be frustrating to see those balances fall.
But as those fluctuations happen, keep this in mind: “Despite those market collapses, our stock market has gained 8% annually going back 125 years,” Nations says. “The key to making money in stocks is to not get scared out of them.”
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.