A bear market is a term that investors tend to fear more than any other. Yet here we are. In recent weeks we’ve seen a drop of more than 20% in asset prices from their recent highs. This will of course shake the confidence of many investors. During uncertain times Julian Broom, our Chief Investment Officer, explains how we can look to the past to help us better understand how markets react.
Bear stock markets are common
Over the last two decades there have been two bear markets in global stocks – both of which lasted more than a year, bringing with them market falls in excess of 50 per cent.
The key to getting through the turbulence is to understand that market swings are normal and are relatively insignificant over the long term.
But it can be difficult to recall just how a bear market makes you feel, especially following a sustained rise in share prices such as we’ve just seen.
Long term performance
It’s important to recognise that trying to time the market in the hope of avoiding a loss or netting a gain rarely works and could hurt long-term performance.
For example, when looking at the Standard & Poor’s 500 Index between 2000 and 2019 the compound annual return was 6.1%. Yet if you excluded the ten best performing days the return would have dropped to just 2.4%. Furthermore excluding the 25 best performing days would have delivered a figure of -1%. With this in mind it’s important to maintain your portfolio, in line with your long-term financial strategy – those good market days may quickly follow a downturn. In fact the best performing and worst performing days tend to cluster – which is why analysts have demonstrated that successful market timing tends to be a myth.
Be patient and keep focus
It can be difficult – particularly in unprecedented situations – not to make impulsive decisions or, conversely, feel overwhelmed with what’s happening globally. A few watch words can be useful – stay focused on your long-term goals, remain patient, keep perspective and maintain some form of discipline as you consider any options.
It can be useful to ensure you have a balanced portfolio with a mix of global and domestic equities, bonds and commodities to help weather the storm and ensure you are well-placed for the recovery. And do work closely with your financial adviser to re-balance your portfolio as needed to keep your asset allocation in check against your investment goals.
In summary, do remember that market turbulence is to be expected, and equity bear markets happen frequently; with seven in the US since 1980, and five in the UK during the same period. Nevertheless the current situation will undoubtedly feel difficult to navigate. We are here to help. If you have specific queries please contact our financial planning team.
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