It is easy to become embroiled in the hype surrounding the current bear market. After all, the stock market has moved 24% lower in a matter of months. This has caused investors to experience losses, sometimes significant, on their portfolio holdings.
Since this can be a difficult experience, it is worth remembering a few key points about bear markets. Doing so could help you to avoid the worry and fear that often accompanies bear markets and enjoy improved portfolio performance over the long run.
A short-lived affair
Bear markets do not last all that long. Indeed, the average length of a bear market is under a year. This compares to the three-year average length of a bull market. Therefore, while it can feel as though falling share prices will last forever while they are occurring, they may not last anywhere near as long as many investors believe.
Clearly, every bear market is different. Some have lasted for much longer than a year. For example, the bear market associated with the global financial crisis lasted for around 14 months. However, on average, investors should not expect the stock market’s recent disappointing performance to persist ad infinitum.
A part of investing
Bear markets are part of investing. Just as night follows day, they have continually followed bull markets since the stock market began. As such, they are not a new phenomenon and are simply something that happens every so often. Therefore, investors should not be surprised that a bear market is currently taking place.
Importantly, the S&P 500 has recovered from every single one of the previous 26 bear markets it has experienced since 1928. In doing so, it has gone on to post new record highs. Investors who buy shares during bear markets should look ahead to improved conditions that will almost certainly materialize over the long run.
Some of the best buying opportunities that investors will ever experience occur during bear markets. Investor sentiment is weak and this can mean that high-quality companies trade at extremely low prices. Indeed, as Benjamin Graham, the father of value investing, once said, “The intelligent investor is a realist who sells to optimists and buys from pessimists.”
With the VIX index having doubled since the start of the year, investor sentiment has weakened significantly in recent months. As a result, well-known companies with clear competitive advantages and sound financial positions now trade at share prices that are substantially below their previous highs.
Buying a diverse range of them has historically led to long-term investment success. Almost inevitably, investor sentiment improves and provides a tailwind to their market values. This can lead to higher returns than may be achievable when shares are purchased during bull markets.
A focused strategy
It is difficult to remain rational when stock prices are sliding heavily. But investors who can remember that bear markets are a normal part of investing, do not last forever and provide highly attractive buying opportunities may fare better than their peers over the long run.