The current COVID-19 crisis has wiped billions from the world’s financial markets. In the world of investing, such markets where share prices are falling are known as bear markets.
Beating a bear isn’t easy, but you’ll be pleased to read that in all 10 prior occasions, the FTSE All-Share has completely made up the ground in the next bull market, a market where share prices are rising. Unfortunately, it usually takes longer for markets to rise than it does for them to fall.
Bear markets are typically nasty, brutish and short, like recessions rather than economic upturns. Again using the All-Share as a guide, the average time it has taken to recover a bear market loss is 648 days, compared to the 385-day average market downturn.
Staying invested even when markets are falling can be wise because if you sell, you own less shares that can potentially gain value when the market starts to rise again. Stock market investing is best conceived as a long term game played over years rather than months.
Watch out for the bear traps
Bear markets are littered with sharp advances which often turn out to be nothing more than small peaks before the downward turn resumes. These are perilous to investors who opt for a ‘buy on the dip’ investment strategy.
For example, during the 2000-03 bear market that followed the dot-com bubble, there were six major rallies in the All-Share that generated a combined gain of 2,030 points, even as the index actually declined by 1,649 points overall during this period. Those who piled into these market rallies would have lost out in the long run.
Nine of the ten largest single day surges on America’s S&P 500 index have been during bear markets. Beating a bear is a slow game, and those who are over-eager can suffer larger losses.
Trying to see the bottom
Bear markets are like a murky pond – it’s impossible to see the bottom or the trough until after it has passed.
For those of us who don’t have a crystal ball, it’s impossible to foresee exactly how low markets will fall. Taking a slow and steady approach is probably your best bet to conserve your portfolio’s value. This might mean a lower return than a brash approach, but you’re not putting too much money at risk. Additional pain is suffered by those who plough lots of capital into ‘bear trap’ short term rallies.
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