What to do in a bear market

Photo: kakisky/morguefile.com 

Q. If this is a new bear market, how should I change my investments? I’ve been 75 percent in stocks and 25 percent fixed income, and I’m 47 and married.
— Concerned investor

A. There’s a lot to consider when it comes to today’s market and your asset allocation.

First, some history.

In looking at the history of the S&P 500, there have been 10 bear markets — defined as a 20 percent or more drop in share prices from peak to trough — since the 1920s, said Brian Kazanchy, a certified financial planner with RegentAtlantic in Morristown.

If we eliminate the two Great Depression bear markets and focus on the eight bear markets since 1946, the average decline has been 39 percent Kazanchy said. And the average length of the bear market has been 19 months.

“These are certainly severe events that will take an emotional toll on most investors,” he said. “In order to navigate this type of environment, each investor must have confidence and conviction in their investment strategy. Failure to do so will likely lead to the most common behavioral mistake of selling out at low prices.”

Kazanchy said the first question you should ask yourself is if your portfolio is diversified.

He said that the bear markets mentioned above were for the S&P 500, which represent large-cap U.S. stocks. U.S. large companies make up about 50 percent of the world stock index but the other half of the market at times may perform very differently than the S&P 500. And then you need to consider alternative asset classes.

Diversification can help reduce losses in many bear markets.

“For example, during the Tech bubble blowup of 2000 to 2002, real estate investments trusts, commodities, and high yield bonds had positive returns to buffer diversified portfolios,” Kazanchy said. “However, some bear markets like the financial crisis of 2008 to 2009 cause a selloff in just about all risky assets.”

So while diversification is your portfolio’s first line of defense, it still may not be enough.

Kazancy said he prefers a disciplined rebalancing strategy for bear markets. When stock prices fall, you periodically buy more stocks at the lower prices. The stock purchases are funded by selling bond investments which should be retaining (or increasing) in value.

“Looking back at the eight bear markets mentioned above in the S&P 500, the average recovery time for an investor who bought in at the peak of the market would be 37 months or about three years,” he said. “Rebalancing and buying more stocks at lower prices can shorten this recovery time frame significantly.”

You might be considering getting out of stocks and just getting back in later because diversification does not provide protection in every bear market and rebalancing only helps to shorten the recovery time. Well, unfortunately, this is time that we acknowledge no one has a crystal ball, Kazanchy said.

He said even the most brilliant investors are humbled by the markets eventually, and the market often provides false signals.

“In studying the last 36 years of volatility in the S&P 500, we can see that the average intra-year decline is 14.2 percent,” Kazanchy said. “That is only 5.8 percent less than a bear market. Yet in 27 out of those 36 years the S&P 500 finished the year with a positive return.”

You may want to consider meeting with a financial advisor who can look at your investments to see how they are lined up with your long-term goals, and then you can create a strategy to get through tougher markets and end up better off in the longer term.

Or, ask us about a free money makeover at .

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This story was first posted in March 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.