Bear Market Investment Strategies

The S&P 500 dropped in value by more than 50% in the 18 months between October 2007 and March 2009. We recently celebrated the 10-year anniversary of the S&P 500 climbing from that low point in early March 2009.

During that 10-year period, the index increased by more than 300%. Interest rates remain low and earnings growth is strong, even if less robust than in prior quarters. To state the obvious, nothing lasts forever. Many experts don’t see a bear market or even a recession this year. However, each passing day brings us closer to the inevitable. It’s not a question of if but when we will see the next bear market.

Attempting to time the market is seldom a winning strategy. Panicking during a fully expected bear market is not the answer either. One viable approach is to make sure you are properly allocated across asset types. We’ve all seen our portfolios gaining value since the great recession. The answer now is not to completely get out of the market. If an investor takes that approach human nature might prevail, and that investor may wait until months into the recovery to get back into stocks. Subsequently, they will most likely miss a good part of the next recovery.

Once your portfolio is properly allocated across different asset groups, don’t rely on your paper gains. It makes sense to plan and budget with the assumption that your portfolio could be worth 20%-25% less at any time. If you maintain that mindset during a bear market and have sufficient dollars set aside to fund any withdrawals that might be needed over a 5 to 7 year period, you have positioned yourself to withstand a significant drop in portfolio value.

It won’t be a stress-free period, but that approach proved useful to our clients during the Great Recession of 2007-2009. Thankfully, interest rates for some fixed-income options have improved over the past couple of years and the recent “hold steady” approach by their Federal Reserve has dampened the volatility of bond-type investments. Other investment options that do not have a direct linkage to the market that owning stocks convey are also reasonable alternatives to stock ownership in this environment.

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