What Should Retirees Know About Navigating Retirement During a Bear Market?
Key Points
When the market falls by 20% or more from recent highs, it’s labeled a bear market.
Bear markets tend to be much shorter than bull markets.
Panic selling can be an expensive mistake.
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Bear markets are like road construction. They don't last forever, but they sure feel like they do. If you're retired and concerned about what will happen the next time the bears crawl out of hiding, keep reading. The following insights should help calm your nerves.
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Remain diversified
When a market index like the S&P 500 falls by 20% or more from recent highs, it's considered a bear market. Asset values may fall across the board but not evenly. Some industries will be harder hit than others.
Remaining diversified is the name of the game whether it's a bear or bull market. By diversifying your portfolio, you reduce the risk that it will all lose value at once. While one sector may be hit hard, a diversified portfolio means you have investments in other sectors to help keep your portfolio afloat.
Be realistic about how long it's likely to last
The good news is that bear markets tend to be much shorter than bull markets. Historically, the average bear market has lasted about nine and a half months, while the average bull market has lasted over two and a half years.
Do not panic sell
A bear market can be caused by a range of factors, including unemployment, pandemics, wars, declining corporate earnings, high interest rates, international conflicts, overvalued stocks, and investor fear.
It's that last factor -- investor fear -- that fans the flame of a bear market. Let's say you have a neighbor who watches their portfolio like a hawk. They panic the moment they realize how quickly the S&P 500 (or other market index) is falling, and in an effort to "save" their portfolio, they begin selling off anything they can.
Unfortunately, your neighbor is likely to miss out on gains as the market recovers. Since the value of their assets have fallen, they must sell them at a discount. In addition, they must sell more of them if they want to recover a specific amount of money. They may feel better for a moment, but they have fewer assets in their portfolio.
Remember, every bear market in history has been followed by a bull market. For example, between October 1994 and August 2002, a bull market drove the stock market up 266%. In 2002, when the dot.com bubble burst, the market fell by 45%. While that technically pushed the U.S. into another bear market, those who remained invested between '94 and '02 were still far ahead thanks to the dramatic growth of their portfolios during that time.
No one can guarantee how much the market will fall during a bear market, and no one can say how much it will grow when the bulls run again. However, history shows that those who remain calm and stay the course tend to fare better over the long term.
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