As the markets remain volatile following President Trump’s introduction of trade tariffs on goods imported into the US, there has been significant speculation about the prospect of a “bear market”.
You might have seen headlines about how this could lead to a stock market crash and financial losses. This could, understandably, make you feel anxious and stressed about your investments.
Yet, there’s likely no need to panic.
Understanding bear markets and maintaining a strategic approach to your investments should help you continue progressing towards your financial goals – whatever the market is doing.
Keep reading to find out what a bear market is and discover practical tips for protecting your portfolio if one occurs.
A bear market is usually defined as a period when stock prices fall at least 20% from their most recent peak
Stock market volatility is inevitable, with factors such as global political events, changes in investor confidence, and company performance, continually pushing prices both upwards and downwards.
However, the degree of fluctuation can vary dramatically.
If stock prices drop at least 20% from recent market highs, this is often called a bear market. Conversely, if prices increase at least 20% from market lows, this is commonly defined as a “bull market”.
Bear markets could affect an entire market index – such as the FTSE 100 in the UK and the S&P 500 in the US – or individual sectors.
While short-term fluctuations in the market are common, bull and bear markets typically last for longer, resulting in higher or lower than average prices over an extended period.
Bear markets are normal, and the markets typically recover over the long term
During a bear market, you may see greater market volatility and the value of your portfolio could decline, sometimes significantly.
However, it’s important to remember that bear markets are relatively common and they don’t last indefinitely. In fact, they are typically more short-lived than bull markets.
The chart below from Vanguard shows that there were six bear markets between 1969 and 2024, with each lasting an average of 1 year and 3 months. In contrast, the average length of bull markets during the same period was 6 years and 10 months.
Source: Vanguard. Past performance is not a reliable indicator of future results.
Moreover, according to Forbes, 42% of the S&P 500’s best trading days in the last two decades occurred during bear markets.
So, a bear market could present investing opportunities which may help to offset any losses you experience. Additionally, the markets typically recover over time, so by staying invested, you may benefit from future recoveries.
The graph below from Morningstar shows how a $1 (in 1870 US dollars) invested in a hypothetical US stock market index in 1871 would have grown to $18,500 by the end of June 2020 – despite multiple severe dips in the market over this period of 150 years.
Source: Morningstar
What’s more, the markets typically reached new highs following a bear market, recession, or market crash.
3 practical tips for investing during a bear market
Experienced investors know that ignoring the noise of market fluctuations is the key to achieving their financial goals.
Whether it’s a bull or bear market, the fundamental principles of investing remain the same.
1. Think long term
As you have seen above, the markets usually recover over time, even from significant declines, such as during Black Monday and the Great Depression.
So, it’s important to avoid panic selling during a bear market as this could turn a potential loss into a real one.
Instead, keeping your money invested and maintaining a long-term perspective could allow you to benefit from any future recoveries.
Moreover, a bear market may provide valuable opportunities to buy quality assets at lower prices. Over time, the value of these investments could increase, bolstering your returns.
2. Diversify your portfolio
If your portfolio is heavily weighted in one particular asset class, sector, or geographical region, this could leave you vulnerable to sudden downturns in the market.
In contrast, creating a well-diversified portfolio may help reduce risk and cushion the potential negative effects of a bear market.
For example, figures published by JP Morgan show that in 2020, the UK FTSE All-Share Index fell 9.8%, while the US S&P 500 rose in value by 18.4%.
So, if you had diversified across these two markets, any losses you made in the UK may have been offset by your gains in the US.
3. Seek financial advice
A bear market may seem concerning, but it also provides a good opportunity to review your investment strategy to ensure it matches your tolerance for risk and long-term goals.
Yet, it may be difficult to remain calm and objective if the value of your portfolio dips. That’s why working with a financial planner could be so beneficial.
At Lloyd O’Sullivan, we can provide an impartial perspective and steer you away from emotional decisions that may hamper your progress towards your goals.
If your circumstances or aspirations change, our financial planners can help you adjust your investment strategy to suit your current needs.
To find out more about working with us, please get in touch by emailing info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can assist you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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