What to do as an investor in a bear market?

Last week, we entered our eleventh “bear market” (in dollar terms) for global stocks since 1970. A bear market happens when the stock market’s price declines over an extended period of time and has fallen at least 20% from peak levels.

Reading the headlines over the past few weeks can be both confusing and scary, however, what do these headlines actually mean for your portfolio and what’s the story behind them?

With UK inflation due to hit double digits by the autumn in what is currently a 40-year high; economists predicting the US will enter a mild recession by the end of 2022 and the Yen hitting a new 24-year low this week, it’s no wonder people are left wondering what to do.

The first thing is not to panic. Markets and economies go up and down and work in cycles and this dip is part of the investment cycle. If you have specific concerns about your own portfolio, reach out to your financial advisor who will be able to help you and provide informed, relevant and timely advice bespoke to your portfolio, situation, financial goals and timeline.

Current Market Conditions: A Bear Market

Last week, we entered our eleventh “bear market” (in dollar terms) for global stocks since 1970. A bear market happens when the stock market’s price declines over an extended period of time and has fallen at least 20% from peak levels.

Current Market Conditions: A Bear Market

But what does this mean in reality? Whilst stock markets may have fallen 20%, most clients will not have seen such volatility in their portfolios due to the Finsbury Associate’s investment philosophy which involves a satellite and core, diversified approach. The incorporation of diversified funds in clients’ portfolios rather than a reliance on individual stocks helps to protect against such dramatic losses during market fluctuations. 

This is also the time where active, rather than passive management of your investment portfolio is key.  In a recent blog article we explained the importance of active management during market fluctuations and the potential advantages that can be seen.

At a time when the S&P is down over 20% and Bitcoin has lost nearly 60% over the last 6 months, DIY investing is particularly dangerous. A qualified team of financial advisors and investment managers can help navigate this path giving you the best chance to help meet your financial goals.

What happens next?

Now that we have officially breached the 20% dip in global stock markets, a historically important level, the question on most investors’ minds is what next? 

Analysing the graph with historical data above indicates that in the short term, the situation is likely to get worse before it gets better as sell-offs deepen. However, in the longer term, looking at one, three and five-year returns for stock markets post a 20% dip, the picture for longer-term recovery and growth is encouraging with average returns 5 years post bear market 59.6% up.

What to do as a savvy investor in a bear market?

*Chart courtesy of Quilter Cheviot

Buying opportunities in a falling market?

When looking at your portfolio it’s important to look at the overall market and long-term picture, taking into account your investment time frame.

Firstly, it’s important to stay invested. Before making rash, short-term decisions ensure that you consult with your financial advisor to ensure that your plans are in line with your investment objectives and time frame. 

A bear market can present some great buying opportunities as markets are down and whilst your portfolio holdings may shift, it’s important to work with your advisor and ensure you stay invested to capitalise on the longer-term gains. 

No one, including your advisor knows when the bottom will be, therefore we encourage clients who have surplus cash to invest, to do so using the dollar-cost averaging method by putting in smaller amounts over a regular time frame. Regular investments over the long term ensure that you will be able to both stay invested and brings down your average cost per unit. For example, if a client has $100,000 cash surplus to invest, by investing $10,000 a month over 10 months during a volatile period the client is generally able to achieve a lower average unit price. 

Obviously, each client’s situation is unique and it’s important to speak with your financial advisor to get advice specific to your situation. If you would like to book a complimentary financial review please get in touch with us.

Notes: Past performance is not necessarily an indicator of future performance. 
Sources: Quilter Cheviot, Refinitiv Datastream, Bloomberg, FT