You probably don't need a former reporter to tell you this, but there's a longtime saying in the news business: "If it bleeds, it leads." In other words, people pay more attention to bad news than to good news. Anthropologists say it has to do with humans being wired to look for potential danger.
If you're nearing retirement and begin to hear rumblings about a bear market, it's important to know what that could mean for you. Sometimes, knowing what you're up against is enough to help you develop an effective strategy. You can start by answering the following questions.
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1. What is a bear market?
While definitions vary, when a market index like the S&P 500 drops by 20% or more from its recent high, it's often considered a bear market. When the market increases by 20% or more, it's a bull market. While bear markets can feel scary, they also present an excellent opportunity to fatten your portfolio with high-quality assets at a bargain price.
2. Is this normal?
Bear markets are a regular part of the economic cycle. There's nothing mysterious about them. Bear markets simply indicate that market values have cooled. Since 1928, there have been 27 bear markets. And here's the good news: Since 1928, there have been 28 bull markets, and bull markets tend to last a lot longer than bear markets.
3. Should I have seen this coming?
No. If you could spot a bear market coming, you could sell your talent for billions. Seriously, one of the silliest things investors try to do is predict what the market is about to do next. Just as you can't time the stock market, you can't time a bear market.
4. How long can I expect this to last?
As mentioned, bear markets tend to be short-lived as compared to bull markets. The average length of a bear market is about 9.6 months (289 days), while the average length of a bull market is 2.7 years (988 days). In other words, the market is up more often than it is down.
5. Should I pull my money out of the market?
Pulling your money from the market may feel like the right thing to do, but it's often a mistake. Approximately 42% of the S&P 500 Index's strongest days on record occurred during a bear market, and another 36% of the best days happened in the first two months of a bull market, before it was clear a new bull market had begun.
In other words, people who stick it out through a bear market not only leave more assets in their portfolios, but those assets are ready to rebound as the market begins to expand rapidly, fattening portfolios.
According to The Hartford Funds, research has discovered a fascinating fact about the past 30 years of bear and bull markets. Let's say you've had money in the market for the past three decades. If you'd missed out on the 10 best days during that time, your overall returns would have been cut in half. And if you'd missed out on the best 30 days, your returns would have been reduced by 83%.
Leaving early and missing the recovery can be a costly mistake.
6. Does a bear market indicate that a recession is coming?
Maybe, but maybe not. A recession has only accompanied 15 of the 27 bear markets that have occurred since 1928. Given that bear markets are associated with a slowing economy, it would be natural to expect a recession to follow. However, it doesn't always happen that way.
7. Will this be the only time this happens during my retirement?
Hopefully not. The longer you live, the more bear markets you're likely to experience. A person who invests for 50 years can expect to live through around 14 bear markets (and at least an equal number of bull markets).
8. Is there anything I can do to prepare?
Absolutely! Build a cash or cash equivalent fund that you can draw from during a bear market. After all, when asset values drop, you have to sell more of them to withdraw the money you need. If you have another account to draw from instead of reducing your portfolio by more than you intend, you can leave those assets in a place where they can benefit as the market begins to improve.
The next time someone tries to tell you how shocking or scary a bear market is, remind yourself that you know way too much about how bear and bull markets work to be scared off.
