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Surviving a Bear Market

Not that long ago, the idea of a bear market seemed almost inconceivable. For an entire generation of investors, the great bull runs of the 1980s and 1990s were the only markets ever experienced. But the new millennium has brought with it several doses of reality, and even novice investors have learned that markets can -- and do -- go down as well as up.

Weathering a down market can be frustrating -- especially if you're using the same investing strategies that worked well when the market was on its way up. In fact, surviving a bear market requires patience, a long-term perspective, and the use of different strategies to help minimize the impact of falling stock prices on your portfolio.

Putting Market Returns in Perspective

Bear markets are nothing new. Between 1950 and 2020, there were 10 bear markets, defined as a drop of 20% or more from the market's previous high. The average bear market lasted about 14 months, with an average market decline of 34.2%. In contrast, the nine completed bull markets during this time period lasted more than four years on average, with an average gain of 136.2%.1

Since 1926, the S&P 500 has recorded a 10.05% annualized return. And if the boom years of the late 1990s (1995-1999) are excluded from this figure, the S&P 500 produced a 9.3% annualized return. Accordingly, if you are to survive a bear market, the first thing you need to do is readjust your sights from the unsustainable performance levels achieved in the late 1990s.

Should You Sell?

Not surprisingly, the first reaction to a falling market is to bail out. But that kind of short-term thinking may not be in your best interest -- especially if you sell at a loss. Before selling, you should consider several factors. First, look at your time horizon; i.e., when will you need to use the invested funds. If you are investing for the long term -- for retirement, for instance -- then there's a strong likelihood that the market will rebound before you need to use the funds. Second, consider your alternatives. If you take your money out of equities, where will you invest it? Remember that in the long term, stocks have outperformed the other asset classes -- bonds and money market securities -- by a significant margin, although past performance is no guarantee of future returns.

Magnitudes of Bear and Bull Markets -- 1956 to 2019
Source: ChartSource®, DST Retirement Solutions, LLC, an SS&C company. Stocks are represented by the daily closing price of the S&P 500 index, an unmanaged index that is generally considered representative of the U.S. stock market. The percentage increase in the final period represents the gain through December 31, 2019. It is not possible to invest directly in an index. Index performance does not reflect the effects of investing costs and taxes. Actual results would vary from benchmarks and would likely have been lower. Past performance is not a guarantee of future results. © 2020 SS&C. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. (CS000144)

Maintain a Portfolio That's Right for You

If you haven't already done so, take a good look at your investments as a whole. What is your portfolio's asset allocation -- your mix of stocks, bonds, and cash equivalents? If you use your risk tolerance -- your emotional and practical ability to handle risk -- to guide the asset allocation process, you'll be better prepared to cope with market volatility.

Reviewing your asset allocation can help you answer another question about your portfolio: Is it adequately diversified? In other words, have you spread your money among different investments to potentially help reduce risk? Different securities do better at different times. Therefore, holding a variety of investments creates the potential for those that perform well to compensate for those that do not over a period of time. Neither asset allocation nor diversification guarantees against investment loss.

Consider the performance of the U.S. stock and bond markets in 2008, for example: Although large-cap stocks, as measured by the S&P 500, lost 36.99%, long-term government bonds gained 22.67%.2 Investors who invested in stocks and bonds may not have experienced the same declines in their portfolio value as investors who invested only in stocks.

Finally, when assembling or maintaining a portfolio, consider tapping the expertise of a seasoned financial professional who has been through a number of market cycles. He or she can make suggestions regarding your portfolio mix, explain current market trends, and help you stay focused on your long-term financial goals.

Four Tips for Surviving Bear Markets
  • Implement a well-thought-out investment plan and then stick with it. You may increase your chances of being around when the bull takes its next run.
  • Do not make investment decisions based on short-term market drops or gains. Instead, evaluate how an investment fits into your overall financial strategy.
  • Look at a bear market as a buying opportunity. Some stocks may be undervalued following a broad market decline, allowing you to invest more in high-quality companies.
  • Talk with a financial professional. He or she may have been through volatile periods before.

1Source: SS&C Technologies, Inc. Based on the daily price close of the S&P 500. A bear market is defined as the S&P closing at least 20% below its previous high. Its duration is the period from the previous high to the lowest close reached after it has fallen 20% or more. A bull market is measured from the lowest close reached after the market has fallen 20% or more to the next high. Average gain does not include the current bull market gain.

2Source: SS&C Technologies, Inc. The S&P 500 index is an unmanaged index considered representative of large-cap U.S. stocks. Long-term bonds are represented by the Bloomberg Barclays U.S. Government Long index. Individuals cannot invest directly in any index. Past performance is no guarantee of future results.

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