If you’ve ever been camping, you know that the occasional bear could creep into your campsite, ready to make a meal out of your food stash. The same is true with investing: Every now and then, a bear market can take a bite out of your wealth.
A bear market is a period when the stock market is down significantly from recent record highs. But there’s no need to call the park rangers. Instead, we’re here to help you navigate these perfectly normal (and potentially scary) market cycles and equip you with tips on handling a bear when one comes along.
When the stock market declines 20% or more from recent market highs for at least two months, that’s the definition of a bear market. That decline is typically measured using broad market indexes, such as the S&P 500 or Dow Jones Industrial Average.
So, why do these big declines occur? The simplest answer is that investors feel pessimistic about the economy’s direction. As a result, they stop buying stock and instead start selling their stock holdings, which causes stock prices across the board to decline.
Some factors that can cause economic pessimism include:
While there’s no way to tell exactly how long a bear market will last, it’s important to know that they are common occurrences.
Now, for some good news: In nearly every instance, the subsequent recovery was longer than the bear market it followed. For example, the average recovery period was 19 months, compared to the 11 months for the average bear market — plus, some recoveries lasted as long as four to six years.
Market corrections are like bear cubs: They might not steal your entire picnic basket, but they could swipe an apple pie.
Market corrections happen when the stock market declines by more than 10% from its recent high but less than 20%. And the good news is that most market corrections recover before becoming full bear markets.
We’ve experienced 24 market corrections since 1974, and only five became bear markets. In most cases, the stock market recovers and investors quickly earn back their losses.
While market downturns are inherently unpredictable, there’s plenty you can do to protect your investments while the markets play out the current cycle.
In a bear market, you might lose a bit of your picnic today, but you’ll walk away with your plan intact and a good story to tell. But, of course, your ability to weather any market movement has everything to do with having a well-crafted financial plan and the proper asset allocation for your goals.
If you’re unsure about your current asset allocation, consider talking to a financial advisor. We can even help you figure out how to find your perfect financial advisor fit. You can find an advisor who consults hourly or one to help manage your assets through every market cycle. That extra set of eyes might be just what you need to stop stressing about your investments and sleep well at night.
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