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How To Respond To a Bear Market

If a trusted colleague or close friend told you that the next bear market was right around the corner what would you do with your investments?

Perhaps you don’t believe your colleague because your financial advisor assured you that the current bull market will last many more years.

According to The Balance, from 1900 – 2014 there have been 32 bear markets so it’s likely we will experience a few more in our lifetimes. 

How to Respond to a Bear Market

In order for your investments to survive a bear market you will need to have a plan. 

First, make sure your portfolio is properly diversified.

Capital markets are unpredictable so instead of trying to beat the market, focus on what you can control. 

One strategy is to add high quality bonds exposure to your investment mix. This time honored technique can improve the probability of your portfolio withstanding a large drop in the market.

How Selling Impacts Your Portfolio

During a bear market your first instinct might be to sell while you still have the chance to avoid  significant losses. To the average investor this might sound like the right thing to do.

That is why I am here to tell you this: 

Do. Not. Sell. Yet.

Selling your stocks when the market is down is an emotional decision and is likely to do more harm than good. 

According to this chart by Dimensional Fund Advisors (DFA), by selling prematurely and missing out on just 5 of the best single days in the market, your potential returns are cut almost in half. 

Think you can time the market? Think again.

Source: Dimensional Fund Advisors Returns 2.0 

In order for your portfolio to benefit from the days when the market recovers, you need to stay committed and stick to your plan. If you do this, your return on investments is likely to be greater than if you were to sell prematurely. 

Waiting Is the Way Forward

So, if you aren’t selling, then what do you do? 

You wait.

You wait, and wait, and wait, until stocks recover. Then when the time is right, you rebalance your portfolio.

The discipline of rebalancing allows you to maintain your desired risk tolerance by repositioning stock and bond exposure to your designated targets. 

By properly rebalancing during a bear market, your portfolio can benefit, and you may avoid sacrificing returns over the long-term. 

Don’t believe me? Take a look at this chart that illustrates capital market growth over the last 6 decades.

Source: Dimensional Fund Advisors Returns 2.0 

As you can see, capital markets reward long-term investors. It is important to remember that while there will always be uncertainty and risk, historical results indicate capital markets are likely to continue to grow and provide positive returns going forward.

If you trust the numbers and data, you can see that rebalancing is likely to reward long-term investors.

Although this all sounds simple, it is easier said than done. The reason many investors do not follow this approach is because knowing when to buy and when to sell is the hardest part. Having an advisor that’s an expert in asset allocation and rebalancing can help reduce or even eliminate your concerns.

At Pathways Financial Partners, we help guide investors through bear markets and help them reach their financial goals. 

If there is uncertainty surrounding your investment portfolio or you are worried that you won’t withstand the next bear market, call us at (520) 299-5875 or send us an email at information@2pathways.com and we can help bring clarity to your financial future.

Moral of the story: 

Bear markets are dangerous and unpredictable, but with the right guidance you can feel confident that your portfolio has the right blend of risk and return just for you.

Schedule a Free Consultation