Investing in a Bear Market

What exactly is a bear market? How does investing in a bull and bear market differ? First, a bear market is a pullback in excess of 20%, not to be confused with a correction of 10-20%. Bear markets are difficult to predict and corrections are impossible to time with any consistency.  Bear markets typically last much longer than corrections. After hearing this, you may think investing in stocks is not worth it, but there are strategies for seeking to limit your exposure when investing in a bear market. 

A strategy that can be successful in dodging a bear market may require shifting to a more “market neutral” position.  This might include increasing investment opportunities in cash and Treasury bill holdings and putting hedges in place.  These aren’t the kind of steps you would want to take in a correction-a 10-20% drop.  That’s because it’s not possible to consistently time and re-enter the market during a correction.  Anyone who tells you otherwise is probably not qualified to manage your money.

The key to going defensive is successful forecasting, though no one is right every time.  The alternative-and what many end up doing—is applying a backward—looking strategy which can end with investors buying high and selling low—the opposite of your goal.  Fear of a bear market is a major panic—raiser among investors. 

Identifying and sidestepping a bear market is only part of the battle.  The decision as to when to re-enter the market can be crucial to performance.  A major risk in these situations is incorrectly calling a bear market and reducing equity exposure.

And don’t be fooled into thinking one big bear and you’re done!  The bigger the bear, generally the bigger the bounce off the bottom.  The table below show returns for bull markets since the Great Depression (excluding the current, ongoing one). 

Bull Market Returns and Duration – Inherently Above Average

*For duration, a month equals 30.5 days. Source: Global Financial Data, Inc., S&P 500 price return.
Explanation: Stocks are up much more often than they’re down. The periods between bull markets are bear markets. A bull market may have multiple corrections during its run. This is a normal part of the market cycle and one of the reasons not to try and time a correction. It’s the long-term trend that gets you to your goals.

Takeaway: Yes, retirement investing in a bear market can be scary and difficult to forecast.  But you have to maintain a disciplined investment strategy and not jump out of the market every time you think a correction might be on its way.