How to invest during a bear market
Amid all the headlines about interest rates, inflation, and the possibility of a looming economic recession, the S&P 500 Index officially declined into “bear market” territory in mid-June 2022. That means that U.S. stocks declined more than 20% from a recent peak, and Canadian stocks (as measured by the S&P/TSX Composite Index) followed closely behind. Why did stocks decline so much, so quickly? It had a lot to do with the U.S. Federal Reserve Board and Bank of Canada raising interest rates in June to try to combat record levels of inflation (recently hitting 40-year highs).
Despite the current strength in Canada’s economy and labour market, some believe that aggressive interest rate hikes could lead to a recession. This is when a country sees a decline across its economy – its gross domestic product (GDP) – for six months in a row. Whether or not investors have been through a recession before, the headlines are worrying. And worries can leave investors uncertain about the future, about their investments, and about their next move.
So, what does a bear market mean for investors? In this article, we’ll look at:
- What are bull and bear markets
- How bull and bear market durations have compared historically
- Possible investing tactics to use during a bear market
What is a bull or bear market?
A “bull market” is commonly defined as when the market rises 20% over a sustained period after a recent low. If a market is trending upward, it’s a bull market. A bull market tends to happen when an economy is strong or strengthening; it’s an indicator of economic expansion.
Conversely, a “bear market” is when the market declines 20% over a sustained period after a recent high. If a market is trending downward, it’s a bear market. A market tends to enter bear market territory prior to an economic retraction.
Though “bulls” and “bears” are most commonly used in reference to stock markets, the terms also apply to other markets, such as bonds and commodities.
U.S. stocks entered into a bear market in mid-June 2022, but other than a few short months at the beginning of the pandemic, the U.S. market has been a bull market since March 2009, following the 2008 Financial Crisis.
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How long do bull and bear markets last?
Despite how difficult it can be to investors to watch their investments lose value, there’s one thing about bear markets that all investors need to keep in mind: Bull markets have historically been longer and stronger than bear markets. Put another way, while watching stocks decline during bear markets can be scary, they generally don’t last very long.
Check out the chart below compiled by Qtrade’s sister company, NEI Investments Inc. It shows all the bull (in dark blue) and bear (in green) markets since 1960. The key takeaway is that rising bull markets have lasted longer and been more frequent than down-trending bear markets.
Source: NEI Investments
More importantly, the chart also shows that the gains produced from bull markets (median cumulative return of 105.12%) more than offsets the losses from the bear markets (median cumulative return of -33.51%). That’s great news for investors.
How should I invest in a bear market?
Don’t panic. Yes, it’s a bear market and your investments may have taken a worrying nosedive. But don’t give into fear. An emotional reaction could lead you to make rash decisions regarding your investments . If you sell your stock in a panic, your theoretical loss becomes a real loss. And if you’re no longer invested in that stock, you could miss out on gains should that stock make a recovery down the road.
If you need to access your money, of course, you may need to sell your investment, but most experts recommend that you hold onto your stock to ride out the lows until the market recovers at least somewhat. Though it’s difficult to do nothing when your stocks plummet, it might be best to simply sit tight and wait it out.
As we saw in the NEI Investments chart above, bear markets don’t tend to last as long as bull markets. If you sell your investment when it’s down in value, you crystalize/realize the loss. What looks like a loss of value in your portfolio isn’t an actual loss until you actually sell the stock. And then, you run the risk of missing out on the gains you could have made when the market rallies (or rises).
There are some circumstances where it might be an advantage to sell your stock when its value declines significantly: on your tax return.
Tax-loss selling (or tax-loss harvesting) is when you sell an investment that has declined in value below its original purchase price. This triggers a “capital loss”, which can be used to offset capital gains you’ve made on another investment, saving you money at tax time.[LC2] Talk to your accountant to see if this scenario might be right for you.
Revisit your investing strategy and risk tolerance.
Ultimately, if your investment goals haven’t changed, neither should your investing strategy. That’s easy to say when markets are up, but when markets are down, it could be a good time to take another look at your overall investing strategy. If you’re finding it stressful to think about your investments, your risk tolerance may not be as high as you had originally estimated. A bear market can tell you how you really feel about risk. And give you an opportunity to adjust for the future.
When you first created your investing plan, maybe you were much younger, and had a longer time until retirement. Perhaps your investment risk is now too high because you have less time to recover from market dips. Have your financial goals changed? Do you need to shift your strategy to achieve your goals?
It might be a good time to buy.
If the end goal is to buy low and sell high, keep in mind that a bear market is when stock prices are typically at their lowest. If you have the money to do it, you could consider putting more money into the market. It may take a while for the stock to recover, but if history is any indication, stocks have usually been able to regain their old highs within a few years.
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The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.
NEI Investments is a registered trademark of Northwest & Ethical Investments L.P. (“NEI LP”). Northwest & Ethical Investments Inc. is the general partner of NEI LP and a wholly‐owned subsidiary of Aviso Wealth Inc. (“Aviso”). Aviso is the sole limited partner of the NEI LP. Aviso is a wholly‐owned subsidiary of Aviso Wealth LP, which in turn is owned 50% by Desjardins Financial Holding Inc. and 50% by a limited partnership owned by the five Provincial Credit Union Centrals and the CUMIS Group Limited. Credential Qtrade Securities Inc. and Northwest & Ethical Investments L.P. are all wholly owned subsidiaries of Aviso Wealth Inc.