2022 has been a tough year for investors so far, with recession and inflation worries combining to push the financial markets – both bonds and equities – into sharply negative territory. The mighty S&P 500 Index, the leading barometer for equities, and the technology-laden NASDAQ, both reached official bear market territory this year, while the S&P/TSX Composite Index, Canada’s leading equity index, has hit correction territory, meaning a downturn of 10% or more.
Ursas major and minor: The anatomy of bear markets
“Bear market” is an investment term used to describe the market’s performance when it has fallen by 20% or more from its most recent high. While each bear market is different, here are some of their key features:
- Over the last 60 years, equities have experienced 10 distinct bear market events.
- On average, they tend to occur every seven years.
- More than 70% of bear markets have preceded an economic downturn.
- Over the last century, the average bear market has lasted just over two and half years, and the median peak-to-bottom decline over that period was just over 35%.
- The last bear market occurred in 2020 – the COVID Crash – and it was the quickest one on record, dropping 20% in one month, but recovering within six months.
Source: RBC GAM, Bloomberg. S&P 500 Index. Bear markets labelled based on year of index peak before decline. Charts scaled to depth of the deepest bear market (which occurred during the global financial crisis as markets fell over 56% from October 9, 2007 to March 9, 2009) and based on the longest bear market and recovery which spanned 1899 trading days from January 11, 1973 to July 17, 1980. Yellow line represents 20% decline threshold. You cannot invest directly into an index.
Grin and bear it: Important reminders to survive bear market “attacks”
Suffering through a bear market is no easy task for investors, and some make the mistake of veering off of their long-term investment plans. To help keep you on track, here are three important reminders about staying invested in bear markets:
- Keep the bear repellent close – the bear will eventually appear: History has shown us that bear markets are a fact of investing, and can be expected to arise every six to seven years. It’s impossible to know when they will arise, or when they will end – each one will be different. As such, market timing is, as always, ill-advised.
- Ignoring the bees for the honey – bear markets can be positive for long-term investors: For investors with long-term investment horizons and appropriate risk profiles, the lower asset prices offered up by bear markets can pay off over the long term into stronger returns. Leveraging strategies like regular investing and dollar-cost averaging (DCA) can even help you benefit from the opportunities that bear markets can create, allowing you to “buy low” and more when markets are behaving irrationally.
- “Play dead” – stick to your investment plan: In moments of fear and crisis, it’s challenging to avoid falling prey to poor decision making. The old adage to “play dead” if confronted by a bear can be helpful: in short, don’t run or make any rash moves. Having a well-constructed, personalized and risk appropriate plan is critical.
The advice of an advisor can guide you through these challenging times – and help you avoid the long-term scars of a bear market mauling. Talk to us today about how we can help.
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