What a bear market is and what not to do about it

Are you wondering why you keep hearing about a bear market—and what it means? In a bear market, stock prices are falling, and it can affect your investments and retirement savings. When there is a bear market, it’s important to know what to do and what to resist doing.

How do we know if we’re in a bear market?

Bear market describes periods when the value of stocks falls sharply from recent highs, typically by 20% or more. In June, we started hearing about a bear market when the S&P 500 Index, which measures U.S. stock performance, entered that territory on June 13, 2022, closing almost 22% down from its January 3 peak.1 In Canada, the S&P/TSX Composite has not yet entered that territory, but it recently fell as low as 17% from its last high in April, with some individual stocks falling even lower.2 With these drops in both Canadian and US markets, Canadian investors are likely feeling the effects of a bear market.   

A bear market can happen when investors react to events such as slowing economies, world crises, lower corporate profits, or significant changes in the economy or government policies. This affects their confidence in the future of stocks and leads them to sell off shares or avoid risk, causing stock prices to go down. This latest bear market coincides with high inflation, rising interest rates and energy costs, among other things.

How long does a bear market last?

Depending on the forces driving it, a bear market may last for weeks or months. In rare instances, some can last for years, but with occasional rallies where the market goes up. The short answer is that a bear market lasts until investor confidence starts to return. This can happen with a combination of low stock prices and when investors start getting good news about what was affecting their confidence in the first place. When investors start buying again and taking more risk, the market recovers.

Surviving the bear market

Because bear markets are unpredictable, there is no perfect way to protect your investments. Don’t let the uncertainty lead you to do the very thing that you shouldn’t do: make rash decisions. 

When the markets are falling, it’s important to keep your focus on your goals, understand that periods like this have always been temporary, and try to position yourself for the eventual recovery.

What not to do in a bear market—the knee-jerk reaction

A common mistake during a downturn can be to react in the moment by selling off investments. While the temptation to limit your losses may be strong, selling at the wrong time can lock in those losses, and you can miss out on opportunities for gains once stock prices rise. Selling at a loss in a bear market is not likely to help you reach your goals.

If you do need to sell for a specific reason, like if you need cash in the short term, it’s important to ask a financial advisor about what and how much to sell, and to stick to your long-term plan. 

What to do in a bear market—build balance

Weathering a storm takes a well-built ship. In this case, that ship is a balanced fund mix. Wherever you are on your savings journey—at the start, nearing retirement, or already retired—you want to make sure you have a diversified fund mix. This means not only investing in different stocks and bonds, but different types and styles that don’t all behave the same way under the same conditions. This way if one area of your portfolio is not working as it should, another area is there to protect it.

Sometimes certain types of funds don’t react in a bear market as they typically would otherwise. This is what we saw recently with fixed income funds,3 which are not offering the same amount of protection as they usually do. But that shouldn’t change your overall plan. You’ll still be better positioned for a recovery with a balanced mix of funds.

Consider reviewing your portfolio with your financial advisor to see where you can achieve better balance and to get ready for when the market recovers.

What to do above all—be patient

There are several reasons why time and patience can be your best allies:

  • Bear markets have been relatively rare since 1950. There have been 15 bear markets in that time, lasting from one month to 2.5 years4. Even the longest ones come to an end.
  • Historically, markets have always recovered. 
  • Even if you’re retired, time can be on your side, as your investments are funding your long-term as well as your short-term spending.

Keep your focus on your goals. Try to ignore the bear that’s threatening in the short term, because it’s likely to go away in the long term.

Get advice

Finally, before making any decisions in this bear market, talk to your financial advisor. Together, you can review your investments and goals, and make sure you’re as protected as possible and are well positioned for the eventual recovery. 

 

Source: Bloomberg, as of June 15, 2022.

Source: S&P/TSX Composite index, July 15, 2022.

Source: Bloomberg, June 14, 2022

Source: Manulife Capital Markets Strategy Team

The information contained in this article is of a general nature only and should not be considered as personal investment or financial advice. For advice about your specific situation, please consult with your advisor.