"Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." -- Sir John Templeton, fund manager and philanthropist
The stock market, as measured by the S&P 500 index of America's biggest companies, was recently down 20.5% from its 52-week high. That qualifies as a bear market decline (a decrease between 10% and 20% is generally referred to as a correction). And that reflects a lot of pessimism due to many recent factors such as supply chain disruptions, inflation spikes, and rising interest rates.
The coming year could welcome a bull market (though that's far from guaranteed). Here's a look at how to prepare for it.
Image source: Getty Images.
A little historical context
Some bear markets are brief, while others can last years. The average length is around a year, give or take a little. The market's latest descent began early in 2022, but didn't enter bear market territory until mid-June, about six months ago.
How to prepare for a bull market
It's quite possible that the market will reverse direction in 2023, so you might want to set yourself up to benefit from that as much as you can. Here are some ways to do that:
Focus on stocks
For starters, be sure to focus most of your long-term dollars on stocks, if not all. Here's what various asset classes have averaged in returns between 1802 and 2021, according to Jeremy Siegel, a Wharton Business School professor:
|
Asset Class |
Annualized Nominal Return |
|---|---|
|
Stocks |
8.4% |
|
Bonds |
5% |
|
Treasury Bills |
4% |
|
Gold |
2.1% |
|
U.S. dollar |
1.4% |
Source: Stocks for the Long Run, by Jeremy Siegel.
Stocks reign supreme over shorter periods, too. For example, Siegel found that between 1946 and 2021, stocks grew at an average annual rate of 11.3%, versus 5.8% for long-term government bonds.
Pounce on bargains
With the overall market down significantly, many stocks tied to very solid companies are also down -- and in some cases, down a lot. These can be terrific opportunities to buy stocks for less than if you'd bought them a few months ago. Do your research first, and only invest when you're confident.
If you're quite confident, you might invest in one lump sum. If you're less confident, you might develop a position in various stocks incrementally, buying a portion of the shares you want now, more later, and more even later through the strategy of dollar cost averaging.
Consider index funds
Not everyone wants to study stocks and make buying and selling decisions, and those folks should just opt for low-cost index funds, which can grow wealth powerfully, too.
Avoid common errors
Refresh yourself on common investing blunders to avoid them. For example, don't fall for penny stocks, don't engage in short-term trading, don't invest on margin (i.e., with borrowed money), and don't invest in what you don't understand.
Don't try to time the market, either, or you might end up on the sidelines as it recovers. When you find good investments at good prices, it's often best to just buy.
Plan to hold for many years and don't keep too many eggs in one basket
Prepare to be patient. If you want a portfolio with many wonderful long-term performers in it, you'll need to hang on for many years, through both ups and downs. Our Motley Fool investing philosophy recommends buying at least 25 stocks and holding them for at least five years -- at a minimum. Aim to hold great stocks for decades while regularly checking on their progress, business health, and potential. By owning at least 25 different stocks, you'll avoid having too many in one industry and you'll have a greater chance of having some of tomorrow's wonder stocks.
Reinvest those dividends
Investing in dividend-paying stocks is smart, and they can be especially attractive before a bull market begins. That's because as a stock's price falls, its dividend yield increases. So there are some extra-fat dividends out there.
Better still, healthy and growing dividend payers tend to increase their payouts over time. As the years go by, you'll see more and more money just appearing in your investment accounts from dividends. It might be tempting to cash that out, but reinvest it in more shares of stock. Your broker might do so automatically for you, or you can just wait until you have a certain sum and then buy shares of the most promising stocks you know.
Bear markets can be stressful as your portfolio becomes worth a lot less than it was not so long ago. But they also present some excellent buying opportunities. So do some research, find some terrific stocks, and invest for the long term. If you want to make it easier on yourself, just stick with a low-fee index fund or two. That's a great strategy, too.
