The investment world is full of colorful terms, but perhaps none is better known than “bull” or “bear.” As an investor, you’re typically rooting for the bull market, when prices are rising. But you also want to protect yourself for periods when prices are falling. Now that we’ve entered a bear market — typically defined as a market in which stock prices have fallen 20 percent or more from their recent highs — how concerned should you be?
First, consider where we’ve just been. For 11 years, from 2009 to early 2020, stock prices kept rising, with some interruptions, resulting in one of the longest bull markets on record. During this time, stock prices rose around 400% — which means we entered bear territory from an extremely high point. This doesn’t mean the recent losses are insignificant, but market pullbacks present more of a pothole, rather than a complete detour, on the road to your financial goals. If you’ve been investing over time — at least a decade — you still have likely made significant progress toward your goals.
Here’s another point to keep in mind: Bear markets are a normal occurrence in the stock market. There have been eight previous bear markets since 1945, not including the current one, which have lasted an average of less than one year. The good news is bull markets have, on average, lasted five times longer. Of course, as you’ve no doubt heard, the past performance of the markets can’t guarantee how they will perform in the future.
While we can’t predict how long this bear market will last, given the ongoing uncertainty of the coronavirus health crisis, it’s highly likely a rebound will eventually emerge, as has happened before.
So, given all this, how should you respond to what’s happening? When market volatility rises and the value of your investments declines, you might feel tempted to abandon your long-term strategy in favor of one you perceive to be lower-risk. But instead, ask yourself some questions:
- “Have my long-term financial goals changed?” You’ve probably had your long-term goals for quite some time. For example, perhaps you’ve always wanted to retire at a certain age and spend part of the year in a different location. Do you still have this goal today, despite all that’s happened in the markets? The answer is likely yes. If that’s the case, you probably don’t want to abandon the investment strategy you’ve been following, especially given the unique nature of the current market volatility.
- “Am I comfortable with my risk tolerance?” Some investors know that markets will go through occasional shocks, and can live with this knowledge, but others worry to the point that it negatively affects their quality of life. If you are in this second group, you may need to re-evaluate your risk tolerance and, at some point, adjust your portfolio accordingly.
These are challenging times for all of us, as we think about the health of our loved ones and our ability to achieve our financial goals. But it’s important to have confidence that the current health crisis will eventually pass, and that normalcy will return. And as an investor, remind yourself that investing for the long term requires patience and discipline.