On May 20, the S&P 500 index fell into bear market territory. A bear market is defined as a period in which stock values fall 20% or more from a recent high.
This is the first time in more than two years that the stock has fallen so sharply. The last decline of this nature occurred in March 2020, immediately after the COVID-19 outbreak.
Of course, a bear market can be somewhat unsettling, even if you are an experienced investor. But here’s why you don’t need to start panicking.
1. Bear markets are not that unusual
Since World War II, there have been 17 bear or near-bear markets, according to a Morningstar report. It’s not a particularly large number, but it’s not a small number either. So if you’re new to investing, you can be sure this kind of thing has happened before.
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2. Bear markets don’t always last this long
On average, bear markets last about a year. But that doesn’t always happen. The bear market that investors endured in early 2020 was quite short-lived, with stocks managing to more than recover in value before the end of the year.
Granted, without a crystal ball, it is impossible to predict how long a given bear market will last. But while the idea of stocks going down for a year may seem scary, the reality is that you can only really be hurt by a bear market if you liquidate stocks at a loss. If you leave your portfolio alone, you may not lose a dime during a bear market.
3. The stock market has a long history of recovering from bear markets.
It’s definitely unsettling to see your portfolio tank in value. But it’s important to remember that the stock market has a long history of recovering from recessions. Not only that, but some of the strongest periods of market performance have occurred immediately after a bear market.
4. Bear markets can mean an opportunity for long-term investors
During a bear market, stock values decline significantly. That’s a bad thing if you’re looking to liquidate stocks. But if you’re looking to buy stocks, that’s actually a good thing.
While timing the market is not a recommended investment strategy, buying stocks during a bear market could be quite lucrative. Of course, you don’t want to just buy old stock. Rather, focus on the same quality businesses you were buying before market conditions took a turn for the worse (unless there is a specific reason to stay away from those stocks).
Another good option during a recession? Invest in the broad market by buying shares of an S&P 500 ETF. That’s an easy way to take the guesswork out of the equation at a time when you may be nervous and not in the best position to make analytical decisions.
Try to stay calm
A bear market can be scary, but the key is not to act impulsively when stock values are low. Instead, find ways to stay calm, whether it’s diving into a hobby or spending more time on exercise and self-care. At the same time, consider adding to your portfolio when stocks dip to prepare for some solid returns down the line.
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