While day-to-day market volatility is inevitable, there are periods when stock prices stay higher or lower for longer – these are known as the bull and bear markets.
A bull happens when investors are optimistic about the companies’ growth potential and profit outlook, and stock prices generally rise for an extended period of time until hitting a peak. The opposite is called 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. What’s more troubling is that it is hardly predictable. 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%.
Another memorable major bear market followed was 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 predict when is the next bear market approaching, the big question for investors is what can you do to help better respond to a market fluctuation? Try these 5 investment strategies and mindsets below to help you handle a bear market better.
- Keep focused on the long-term – The market goes up and down all the time and 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!
- Making sure your portfolio is diversified – your investment portfolio should contain 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 a professional financial advice – If you are not a savvy investor, seeking a professional advice from a financial advisor can help you manage your investment portfolio better to weather different kinds of markets. A financial advisor 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 awake at night, perhaps you might want to consider adjusting your risk tolerance. Talk to your financial advisor about re-balancing your investment portfolio to avoid a major loss at the wrong time as your financial goals changes over time.
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