It's completely natural to feel a bit uneasy or even worried when you see the value of your portfolio drop. We know that money is emotional, and nobody likes to see their hard-earned savings take a hit. But before you let the headlines drive your decisions, let's take a calm look at the data to understand what's really happening.
What exactly is a bear market?
Investors often toss the term around loosely whenever stocks dip, but there's a precise definition. A bear market is a sustained period of declining stock prices where stocks have dropped at least 20 percent from their previous highs.
To put real numbers on it, imagine the S&P 500 hit 5,000. If it then declined by 20 percent to 4,000, that would officially be a bear market. While the origin of the name isn't 100% certain, experts believe down markets are named after bears because they swipe downward when catching their prey.
Why do they happen?
It's important to understand the "why" so the "what" feels less scary. Typically, bear markets are caused by an economic recession, a stock market bubble, or a combination of both.
When economic conditions deteriorate, consumer confidence usually declines. This leads to a decrease in spending and investment, which eventually results in falling stock prices. On the flip side, a bubble happens when asset prices become inflated due to high demand and limited supply. When that bubble bursts, prices drop sharply.
How long does the pain last?
This is the question on everyone's mind. While some bear markets can drag on for a year or more, the data offers some reassurance. In most cases, the market stops declining within a matter of months. The average duration of a bear market, from its previous high to its lowest point, is typically around 9-10 months, though it can take longer for the market to fully recover and reach new highs.
Since 1928, the S&P 500 has tallied 26 bear markets¹. The good news for investors is that every single one of those 26 bear markets has been followed by a bull market, where prices rise. In fact, we've seen 27 bull markets in that same period¹. Historically, the market has consistently demonstrated an ability to recover over time.
The cost of trying to time the market
When confidence erodes, the temptation to sell everything and wait for a rebound is strong. However, DALBAR, the leading study of market and investor performance, shows that investors who try to time the market do much worse than those who simply stay invested.
Here's the statistic that matters most: over the 20-year period from 2002 to 2022, 25 of the stock market's best days happened during bear markets (Source: J.P. Morgan Asset Management). If you panic and sell, you likely miss those critical recovery days, which can permanently damage your long-term returns.
Three ways to handle the volatility
Instead of worrying about the daily news cycle, here are three practical steps you can take right now.
1. Check in on your feelings
It's healthy to acknowledge how you feel about your strategy. Bear markets offer a real-world test of your risk tolerance. If you're losing sleep, you don't necessarily need to sell, but you might need to talk to a professional to see if your roadmap aligns with your true comfort level.
2. Focus on what you can control
You can't control inflation, interest rates, or the economy. But you can control:
- How much you contribute to your accounts.
- The types of accounts you use, like a 401(k), IRA, or Roth IRA.
- Your level of diversification.
- Keeping your fees as low as possible.
- Your own behavior, since remaining disciplined matters more than market behavior.
3. Look for opportunities
There's a silver lining to a down market. When prices fall, you have the opportunity to buy stocks of good companies at a discount. Dollar-cost averaging, investing a fixed amount regularly, is a great way to do this. You can also look for opportunities to rebalance your portfolio, take losses to offset gains for tax purposes, or even consider a Roth IRA conversion while account values are lower.
Facet is not an attorney and does not provide tax or legal advice. Consult a qualified tax or legal professional regarding your specific situation.
The Facet difference
At Facet, we believe that your financial journey is about more than just investment returns; it's about your entire life. Because we charge a flat membership fee rather than a percentage of your assets, we don't have an incentive to sell you products or panic when the market drops. Our CFP® professionals act as a calm guide, helping you stick to the roadmap we built together so you can look past the temporary dips and focus on your long-term self-fulfillment.
¹ Source: S&P Dow Jones Indices, historical S&P 500 data.
