5 reasons to stay invested with the S&P 500 bear market a few points away

Posted: 18 May 2022 3:01 pm
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The S&P 500 came within a few points of bear market levels last week. The Nasdaq is already there. But prices will stop falling, and those who stay invested usually do the best when things turn.

After five months of steady decline, the S&P 500 came within a few points last week of an official bear market, 20% down from its high point. The Nasdaq is already well past that mark, 30% off its high.

The Dow has a longer way to go, but losses like the 800 points it’s down as of this writing suggest it’s headed that way.

The problems run deep: COVID lingers, inflation soars and the war in Ukraine rages on. And while most investors understand that markets ebb and flow, it’s easy to let emotions take hold in times like these.

Whether this is your first bear market or you’re a seasoned investor in need of some reassurance that this too shall pass, here are five reasons to stay invested during a bear market.

1. Bear markets tend to be short-lived

The S&P 500 has had 15 bull markets and 14 bear markets going back to 1942, according to data from First Trust Advisors and Bloomberg. Not only have the cumulative total returns of each bull market been substantially larger than the average cumulative loss of each bear market, bull market periods have also been significantly longer.

Between 1942 and 2022, the average bull market period has lasted 4.4 years, compared to only 11.3 months for bear markets.

If you’re paying close attention to the markets, the market turmoil can feel like it’s never going to end. But in reality, if you can see past and stay invested in what will be a temporary downswing, you’ll be in a position to benefit from inevitable rallies in the market.

Think of a bear market as setting the stage for the next bull run.

2. Markets under stress have the biggest relief rallies

If you look at the historical performance of the S&P 500 going back to 2000, the biggest up days come in down markets. These down markets include the bursting of the dot-com bubble between 2001 and 2002, the Great Recession between 2007 and 2009 and the shorter-lived but still destructive 2020 stock market crash brought on by the COVID-19 pandemic.

In fact, seven of the best 10 days between January 1, 2002 and December 31, 2021 occurred within two weeks of the worst 10 worst days, according to JPMorgan’s 2022 Guide to Retirement report. Six of the seven best days occurred after the worst days — which means pulling your money out to avoid market lows will likely result in also missing the best-performing days.

Losses are painful, and they hurt more than gains feel good. But staying invested during down markets ensures you don’t miss out on the best days in the market, either.

3. Stocks you were priced out of become more affordable

Popular stocks like Amazon.com (AMZN), Alphabet (GOOGL) and Tesla (TSLA) are some of the most expensive in the world. A bright side of a bear market is that it can make expensive stocks like these a little more affordable.

While fractional-share investing has eliminated much of the pricing barrier of expensive stocks, not all brokerages offer this feature. Market downturns, then, can present buying opportunities of excellent companies that you previously felt priced out of.

Shares of Amazon and Tesla are both down around 39% from their previous highs and Alphabet stock 23%. These stocks may not be at their bottoms but calling an actual bottom is impossible. You may not see this year’s prices again for years to come.

4. Staying in allows you to average down

Averaging down is an investment strategy that lets an investor lower the average cost of a stock holding by investing in additional shares after a price decline. Assuming the stock turns around, it can lead to a lower break-even point.

For example, say you bought 100 shares of XYZ Company at $20 per share. If the stock fell to $10 and you bought another 100 shares, your average price per share would be $15.

Buying those shares at the lower price would allow you to decrease your average purchase price by $5. If the stock price recovers to $20, the total value of your investment will become $4,000 from an initial investment of $3,000.

But investors could also get stuck buying more shares of a losing stock this way, which is why it’s important to, as investment guru Peter Lynch puts it, know what you own.

If you’re going to average down, consider doing it in increments instead of investing your entire lump sum all at once. This will make it easier to stomach if the market continues to drop after your purchase, which, during a bear market, is highly likely.

Why? It’s really hard to time the market.

5. Timing the market rarely works

If you had missed the 10 best days in the market over the last 25 years, your returns would have decreased by more than half, according to data from Summit Financial.

A $100,000 investment in an S&P 500 index in January of 1997 would have grown to almost $885,000 by May 2022 if left untouched. Missing the 10 best days in the market would have resulted in a gain of “just” $402,000. And the more of the best market days you missed, the worse off your returns.

A common expression, or a variation of it, is “focus on time in the market, not timing the market.” In other words, buying early or as soon as you can and holding as the market goes through its cycles shows time and time again to be one of the most profitable investment strategies.

Final word

The bear market, when it comes — if you don’t think it’s here already — is temporary. And as painful as it is to watch your portfolio bleed day after day, the bigger mistake may be removing yourself from the market entirely.

Missing the best days in the market can be devastating to your future returns. And, while investing in a bear market is different, there are still opportunities out there for investors to generate returns, though they may need to be more selective.

Ready to open an account or considering a new broker? Find the best online brokers for your needs. Or check out fees and features in our comparison table to find a better deal today.

At the time of publication, Matt Miczulski owned shares of AMZN, GOOGL and TSLA.

The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

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