Earlier this month, Money, the American financial magazine and Time affiliate, hailed the seventh anniversary of the Bull market. The article highlighted the crash of 2009, when the S&P Index closed just below 677 on March 09, 2009 and when “Many investors grew so terrified of further economic unraveling that they sold equities, bought bonds and cash, and prayed for the best,” highlighting this in clear distinction to where the market is now.
Indeed, market trends have shifted since the days of 2008 and 2009. In mid-March this year, for instance, the S&P opened at 2,047.88, sitting in the mid-range of its 52-week average.
The longevity of bull market conditions, coupled with a volatile start to 2016, prompted many analysts to predict that the start of 2016 would also signal the start of a bear market. Even the Money article above alluded that bull market conditions had run their course.
“To a large extent the past seven years lulled people into thinking that being in a bull market is a God-given right,” said Michael Sapir, chief executive at ProShares. “Bear markets and corrections are still a fact of life.”
This sentiment was also echoed by Forbes contributor Clem Chambers, who duly noted that a bear market is not defined after the event, but instead when a market is going on a persistent downward trend.
“A bear market starts the moment that trend begins, not after it has fallen 20 percent,” writes Chambers.
In mid-January this year, when the S&P lost 11 percent from its May 2015 high, many believed that a market value loss of that amount signaled a new bear market. Although North American financial markets have recovered since then, investors should know how to properly respond when a market correction or even actual bear market hits.
First, investors should relax. The average bear market lasts an average of 1.3 years, i.e. they do not last forever. Also, during a bear market, market values do not usually have a sudden, precipitous decline. Instead, more often than not, investors see a 10 to 20 percent decline followed by a strong rally, as indicative of the market volatility of late.
While a bear market implies scary losses, for long term investors it serves as a mere bump in the road and something that financial plans should have made room for. “A robust investment portfolio is a mix of stocks and bonds,” says investment specialist Wayne Wile. “Bonds are less likely to sustain losses during stock market fluctuations, helping to stabilize portfolios.”
Wayne Wile and other financial analysts advise investors to stay calm during these corrections because they are temporary and emotional overreactions can result in greater losses.
A second tip: historically, markets have recovered from bear markets in less than two years. “In the average bear market the stock market climbs 48 percent a year after the scariest moment in the decline, and 62 percent after two years,” points out Gail Marks Jarvis, Chicago Tribune financial reporter.
A well-advised financial plan often calls for investors to ensure they have at least three months worth of private capital in case of a stock market decline. This gives investors breathing room without having to sell stocks and take a loss.
Lastly, leave investments alone. Trust that your investment strategy is strong; know that market volatility is temporary; and stick to your long term wealth management strategy. Ignore the urge to check the market every second and instead focus on how high quality investments are weathering the storm. This will help reduce market anxiety and show investors what to look for during their next stock purchase.
“I’ve read a lot of advice lately about battening down the hatches, and yes, it is a time to not take uncalculated risks. But, with that said, it’s never a good time to act irrationally or invest emotionally,” adds Wayne Wile.
Despite starting the year with some newsworthy lows, over the last several weeks, the market has recovered much of its losses. Nonetheless, it’s still ever-important for investors to know what to do and what not to do during market corrections and bear conditions.