What we should consider about bear markets
Bear markets – a period where equity markets fall – are the greatest challenge that investors will face.
Bear markets change the decision-making dynamic entirely and make all the usual challenges of being a long-term investor more complex.
We may find ourselves checking our portfolios even more frequently and may find the urge to make short-term trades irresistible.
All investors need to be able to navigate such exacting periods. So, here are certain classic features of bear markets to consider.
Bear markets are part and parcel of equity investing. We know that they will happen, we just can’t predict exactly why or when they will occur.
The long-term return from owning equities would be significantly lower if it were not for bear markets.
It will feel predictable
As share prices fall, hindsight opinion can run amok as people seek to make sense of the volatility.
It may seem obvious that this unstable environment would develop – the warning signs were everywhere.
But it can be too easy and convenient to ignore the ‘red flags’ during more stable periods.
Economic and market news will be conflated
The temptation to link economic developments with the prospects for stock market returns can become even harder to resist during a bear market.
As negative news about inflation or oil prices increases, the more fearful investors can become.
It’s a vicious spiral – and one that a wise investor should rise above.
Time horizons will contract
Being a long-term investor gets even more difficult during a bear market.
Bear markets induce panic, which means our personal ‘time horizons’ shorten dramatically.
We stop worrying about the value of our portfolio in 30 years’ time and start thinking about the next 30 minutes.
Those who are closer to retirement age will find a bear market particularly unsettling.
“There’s a common saying that ‘stocks climb a wall of worry’,” says Rob Gardner, director of investments at St. James’s Place, “which means it’s common for markets to rise, even when worrying events such as Ukraine occur.
In other words, despite short-term fluctuation caused by world events, history shows that investing in assets such as equities has proved the best way to grow capital and protect it from inflation.”
So, hold tight, don’t make any sudden moves into or out of cash, and don’t be tempted to stop making regular investments into pensions, or withdraw from investing entirely.
Lower prices are good for long-term savers
Legal professionals often receive performance-related bonuses and with interest rates still relatively low, combined with market volatility, it can be difficult to find good advice on where to put your cash.
A bear market can be a prudent investment opportunity to buy rather than sell investments by taking advantage of lower share prices.
However, it’s important to remember that seeking expert financial advice is essential if you’re considering investing a substantial bonus.
Our risk tolerance will be challenged
Knowing your own appetite for risk is one of the key principles to establish, right at the outset of investing.
Everyone becomes risk-averse when they are losing money. The problem for investors is that living through a 37% loss is a far different proposition to seeing it presented as a hypothetical scenario.
Bear markets are the worst possible time to find out about – and alter – our tolerance for risk.
If possible, remember your own underlying attitude to risk and avoid making any sudden reassessments.
Each bear market will be different
During a bear market, it is hard to see anything ahead but bad news.
Our tendency will be to believe that things will keep getting worse – prices will be lower again tomorrow.
We should ignore all charts comparing current declines with other bear markets in history, they only foster this feeling.
There is no reason to believe that such a deeply complex, unpredictable system should mimic patterns of the past.
Bear markets are the ultimate investor stress test
The fallout bear markets can cause often says more about us and how we react than about the market recovery.
Two solicitors with identical investment portfolios during a bear market could have wildly different outcomes – and returns – based on the decisions that they make during it.
The surest way for investors to make consistent substantial losses is to lurch from one high profile risk to the next and make poor, knee-jerk decisions.
The best thing to do is think in terms of decades, not days. Good financial advice can help you drown out some of this noise.
Get good counsel. Hold your nerve.
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