Investing can be both rewarding and risky. One of those risks is losing money if markets decline. How would you react to seeing the value of your investments drop?
Using the past as a guide, investors have been rewarded for participating in the stock market, as the value of stocks has risen considerably over time. However, the markets don’t move higher in a straight line. Sometimes markets will decline significantly as a response to particular economic or geopolitical events – or even a health crisis like a pandemic.
Bulls versus bears
You’ve probably heard of the investing terms “bull market” and “bear market,” but what do they mean?
A bull market is the positive phase of the overall market cycle. It represents an upward trend that begins at the point where the market has reached its current bottom level. In fact, a bull market is defined as one where the market has risen in value by at least 20% from recent lows. In contrast, a bear market represents the negative phase of the overall market cycle and officially occurs when the market declines by at least 20% from recent high levels.
Historically, the average bull market lasts roughly three times longer than bear markets. Similarly, gains made in bull markets are approximately three times the level of losses incurred in bear markets. While bear markets may cause short-term pain, investors with a longer-term perspective are able to weather these temporary declines as they can expect an extended market recovery to follow.
Stay the course and ignore short-term “noise”
For the astute investor, bear markets provide an opportunity to buy certain securities (e.g., stocks or mutual funds) at attractive prices, while bull markets can be a good time to take profits as certain investments have gained in value.
But how can investors resist the temptation to sell when markets are rapidly and dramatically declining, and all the news appears to be negative?
For starters, stay focused on your long-term goals, such as retirement, leaving a legacy/inheritance, pursuing philanthropic endeavours, etc. During a bear market, it’s easy to panic and lose your discipline, but you need to avoid an emotional response to short-term noise and accept that markets can be volatile, including periods of significant losses.
You can’t predict the future because surprises will always appear, so the best course of action is to stay invested through turbulent markets. If you try to “time the market” and sell during a downturn, you may end up missing out on large gains if markets rebound sooner than anticipated.
You’re not in this alone
Here are some more concrete actions we can take together to help continue building your long-term wealth – even in a bear market environment:
- Let’s review the plan that we’ve developed for you, and revise as needed
- Stay diversified – include some downside protection strategies to help reduce volatility
- Continue with regular investment deposits – reducing your “average cost” over time
- Minimize any required withdrawals to reduce taxes and keep more money invested for longer
- Reduce discretionary spending, if necessary, to help preserve your capital
- Review your emergency fund strategy
- Consider strategic tax-loss selling to offset capital gains in non-registered accounts
It’s never easy to deal with extreme market volatility – especially when a bear market strikes – but remember that we’ve built a financial plan designed to help you achieve your long-term goals. Let’s stick to your customized plan and put any shorter-term bear market in proper perspective.
Contact our office today to learn more about how your financial plan has been carefully constructed to withstand market downturns.