Understanding market cycles
Even though bear markets mean falling stock prices (and therefore a potential loss of value in your portfolio), there's no reason to fear them. For one, those losses are just paper losses. You only incur an actual loss if you sell during a bear market.
Therefore, for most investors, selling during a bear market is the exact opposite of what you need to do. It's usually wiser to stay put and not move the majority of your portfolio to cash.
Why? Because what usually follows a bear market is a bull market — that is, a market where prices of securities rise. If you can keep investing in a downturn, you are effectively buying at a discount, since the value of your portfolio will likely rise during the next part of the cycle.
If you look at the stock market's performance over time, you'll see that, historically, the value of the market has always trended upward.2 That doesn't mean that crashes don't happen and bad years don't strike — they most certainly do. What it does mean is that things are likely to rise again at some point in the future, and the investors who sold during the bear market almost always miss out on the climb back up.
How to prepare your portfolio for a bear market
None of this means a bear market is fun for an investor. It can be scary to see prices falling — especially when it feels like they'll never stop going down. However, you can prepare your portfolio to better weather a bear market.
By taking the following steps, you'll help stem losses when the market is going through an inevitable downturn:
- Understand market volatility: The more you understand normal market behavior, the less you'll be spooked by things like volatility when they occur.
- Diversify appropriately: Diversifying your portfolio keeps you from putting all of your eggs in the same basket. When one part of the market goes down, another part might not be as affected. For example, during the Great Recession, businesses that offered customers access to low-cost products, such as McDonald's and Dollar Tree, actually performed well.3 Spreading your portfolio across market segments helps avoid having everything crash all at once.4
- Know your risk tolerance and capacity: You need to know how much risk you can afford to take and how much you can emotionally handle. If your tolerance and capacity for risk are both low, then your portfolio should be invested more conservatively so you don't ride a bear market all the way to the bottom. Just know that there are always trade-offs with risk and reward — the less risk you take, the smaller you should expect your reward to be.
- Have a plan: Investing in a vacuum doesn't work. You need a complete financial plan to help you understand the right moves to make — through both bull and bear markets.
The best defense against a downturn: keep calm
While it's good to have a solid plan, the best thing you can do might have nothing to do with how you manage your portfolio — and everything to do with how you manage yourself. Investor fear and worry are often contributors to bear markets - and it is usually in response to a sluggish economy or uncertainty around political events.
When people start feeling fearful, they start selling, and the price of stocks tends to fall. The falling stock price causes even more fear,and can even lead to full-blown panic. The best thing you can do for yourself in the face of everyone else's fear is to remain calm and not give way to hysteria.
Of course, this might be easier said than done. That's why an objective third party, like a financial advisor, can provide so much value. It's not easy to sit on the sidelines and not react emotionally when everyone else is panicking and the news headlines get increasingly dramatic.
A good advisor can help you navigate through the noise and remain calm, especially when the best action to take with your investments is no action at all.
To learn more about partnering with someone who can help keep you on the right track even when markets go through turbulent times, find an experienced Synovus financial consultant who can help you be prepared whatever the market does.