Over the long term, the U.S. stock market is one of the best ways to compound wealth. But unlike a Treasury bill or certificate of deposit, the stock market is home to intense volatility and can even post multiple down years before recovering. Those down years have historically been excellent buying opportunities, as the stock market produces an average gain of 8% per year, even when factoring in bear markets. But no one knows what the stock market will do in a given year or when it will recover.
If your investment portfolio is down big and you're looking for ways to navigate volatility, you've come to the right place. Here are five simple strategies to outlast a prolonged bear market.
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Develop patience and perseverance
One of the main reasons why so many individual and institutional investors underperform the broader indices is that they don't let time work in their favor. A handful of winning stocks compounded over years or even decades can make up for dozens of underperforming positions. But the only way to unlock those monster gains is to let an investment thesis play out. Waiting patiently for the story to develop, as well as persevering through periods of heightened volatility, are two essential practices to use no matter the market cycle.
Set reasonable expectations
The late-2018 U.S.-China trade war-induced bear market and the spring 2020 pandemic-induced bear markets were followed by sharp rapid recoveries. But it's safe to say that this bear market is not following the same storyline.
Most bear markets last for over a year. But it can take several years for the market to recover to previous highs.
For example, it took over 15 years for the Nasdaq Composite to recover after the dot-com bust in the early 2000s.
After the 2007-2009 crash, the S&P 500 didn't reach a new all-time high until 2013.
This is all to say that investors shouldn't expect the market to recover rapidly like it did in the past two bear markets. Instead, it's more typical for recoveries to take time. Setting reasonable expectations can help investors stay patient and avoid hastily selling positions.
Chart a realistic time horizon
It's far more critical to meet your financial goals than to beat the stock market. Setting an investment strategy that matches your time horizon protects against bad years in the stock market. For young investors or those that have yet to reach their peak earnings years, a stock market sell-off can be a net positive. If you're going to be a net buyer of stocks in the years to come, then you don't mind when stocks go on sale.
To illustrate the advantages of lower prices, let's compare the stock market to the real estate market. If you're currently renting and looking to buy your first home, then it's in your best interest if housing prices fall. The same goes for young investors and equity prices. But you don't just have to be a new investor to benefit from lower asset prices.
Folks who want to buy a rental property or a second home, or sell their home and buy a more expensive home, are better off when real estate prices drop. In the same way, those who plan to invest more money in the stock market in the future than they have in the stock market today benefit from lower prices.
Understanding the importance of investment time horizon can be comforting for those experiencing their first prolonged bear market, because there's a good chance the bear market could do more good than harm for your portfolio.
Invest in companies that match your risk tolerance
However, not everyone is lucky enough to have decades of asset accumulation ahead of them. Folks who are going to be net sellers of stock in the future would do well to invest in quality, established companies. These companies may not produce explosive gains, but they'll be better equipped to navigate challenges.
Companies like Procter & Gamble (PG 0.38%), United Parcel Service, and Target have histories of strong management, slow and steady growth, and dividend raises that can provide reliable passive income no matter how the stock market is performing.
Closely related to the importance of time horizon is risk tolerance. Risk-tolerant investors or those with limited time horizons may be better suited investing in stodgy, income-producing stocks. While those with a higher risk tolerance or a longer time horizon would probably be better suited mixing in growth stocks as well as smaller companies with breakout potential.
Find companies you are interested in
Investing in companies you're interested in, or at least have the confidence to hold over time, is vital for outlasting a bear market. There are countless examples of excellent companies that have seen their stock prices cut in half or worse over the last year. But the power of compounded gains only works if an investor sticks with a good company. Being interested in a company is one of the best ways to make the waiting game a little bit easier.
To be fair, it's easier to follow an exciting growth story than a boring business like Procter & Gamble. But boring businesses can still be intriguing in other ways. Procter & Gamble consistently hits its objectives and fulfills its promises to investors. In this vein, P&G is worth following because it manages risk and consistently delivers on its targets. It may not be the flashiest company, but its a textbook example of a well-run business.
Focus on the big picture
Bear markets can be far less stressful if an investor spends their time charting a roadmap toward reaching their financial goals instead of focusing too much on the price action of stocks. Hopefully, these five simple strategies will give you the confidence and peace of mind needed to outlast a prolonged bear market.
