Handling Bear Markets

The point is not to predict every bear market or crash, but to psychologically prepare for them in advance. Anyone who tells you they can correctly time the market on a consistent basis is either lying or senile. Knowing that a market correction can and will occur is half the battle and therefore must be taken into consideration when it comes to your investments.

Bear markets don’t feel good, but it is a necessary path the stock market must travel. Between the COVID correction and rebound, and the currently bearish environment the market has been on a crazy ride the past couple years. The S&P 500 fell 16.1% from the beginning of April through the end of June, good enough for the 16th worst quarterly return in the U.S. stock market since 1926.

Here’s a look at the 20 worst quarterly returns since 1926, along with the ensuing one-, three-, five- and ten-year returns:

Take a look at the average returns following a steep decline in a short period of time. Past performance is not indicative of future returns, of course, but looking at history can provide some perspective.

There is a great quote from Ben Carlson that I believe nicely sums up the feeling investors have during periods of market corrections and bear markets:

Over decade-long time horizons, your investment performance will mainly be derived from how you handle corrections, bear markets, and market crashes. During every single bear market there will be times when you wonder if the losses will ever stop. You will always wonder how much lower the market can go. The economic news will be terrible. Other investors around you will be depressed. Pessimism becomes pervasive.

— Ben Carlson

In the end, bear markets and corrections don’t last forever. Stick to your plan and investment goals. Remind yourself of your investment time horizon. Do I need this money in the next 1, 3 or 5 years? Thinking through these questions can help you to stomach current market conditions, and a long-term time horizon can be the great equalizer when making investment decisions.

— Brant Jones, CFP®