How to Prepare for the Next Bear Market
The sun is currently shining on the stock market. And for most investors, it probably feels pretty comfortable. But it’s during the good times that investors need to make sure they’re prepared for an inevitable downturn. While it’s practically impossible to predict when the next bear market will hit, being ready for it can make all the difference. Here are 5 ways to survive and thrive when the market takes another extended tumble.
1. Remember That Bear Markets Are Normal
Bear markets can be pretty nerve-wracking for investors. You turn on the news and stocks are down again. Here’s the thing, though: bear markets are actually quite common. The S&P 500, for example, has recorded 15 bear markets since World War 2, according to one expert. These declines have lasted an average of 345 days, though some are much longer and others much shorter. The shortest was 45 days (1998) while the longest bear market since 1945 clocked in at 922 days (2000-2002).
2. Have a Plan and Stick with It
There’s an oft-repeated saying that those who fail to plan, plan to fail. This applies in spades to investing. Sticking to a well-thought out plan will serve you well, because it protects yourself against emotional investing. It’s easy to panic when you see stocks falling, but that is rarely a wise move. Investors who panic to avoid the bear market ultimately suffer, because they aren’t invested when the next bull market comes around.
3. Be Diversified
When the next bear market strikes, most of your stocks will probably go down. The good news is that with a diversified portfolio, your fixed-income investments will help offset at least some of the decline. Case in point: 5-year U.S. government bonds have risen an average of 7.5% during the 15 bear markets since 1945. In fact, bonds only went down during 1 post-war bear market (the 1987 crash) and even then, the decline was minimal.
4. Make Lemonade
“Buy low, sell high”. It’s the advice that all investors have heard but many constantly disregard. Human nature being what is, countless people buy when stocks are close to a peak and sell when they’re near the bottom. Bear markets are when good quality stocks go on sale, so it’s an ideal time to purchase them. If the market gives you lemons (lower prices), remember to make lemonade.
5. Know That Bear Markets Don’t Last Forever
As mentioned, there have been 15 bear markets since 1945. Just as day follows night, bear markets ultimately retreat and a new bull takes over. When the next bear market comes around, it may feel like it won’t ever end. Just remember: they always do. Even during a storm, reminding yourself of the brighter (investment) days ahead will give you peace of mind and keep you on track with your long-term plan.