Recently, you read about why you should not let current events and investment turbulence affect your long-term, investment strategy.
As an extension of that, I’d like to go a step further and explain why a bear market – a period where markets are falling – can be a good thing rather than something you should be alarmed by.
Bear markets are an opportunity
In June, the US fell into a bear market. This is when the value of an index or market – in this case, the S&P 500 index – falls more than 20% from a previous high.
CNBCreports that, between the start of 2022 and mid-June, the S&P 500 index fell nearly 21%. Amazon’s share price fell by 39% during that period, while Google parent company Alphabet saw its stock value drop by 27%.
What’s important to remember is that bear markets and market corrections are a feature of investing, not a bug.Forbesreports that bear markets happen about once every 5.4 years, which is why you’ll often see market falls described as “corrections”.
Enduring volatility and corrections are the admission price to receiving long-term returns that will ultimately deliver your financial plan.
Indeed, to the long-term disciplined investor, a bear market is to be welcomed as it is a time when the markets are on sale, and you can buy more units.
Low prices mean more units
Long-term investing is all about buying as many units as possible.
Here’s a simple example.
You can see that, as the price falls, you can buy more units. So, if the markets recover – as they have done historically – your returns will be boosted by the extra units you own.
In the same way, the regular purchase of shares or units over an extended period can often be a more effective accumulation strategy than a one-off single purchase. Known as “pound cost averaging”, it means that you’re buying units at different prices as the price fluctuates.
Don’t fear a falling market
When it comes to investing, rational buying decisions can sometimes be hard to find. For example, if the price of a household appliance fell, you’d be more likely to buy it, not less!
When markets fall there’s a tendency for investors to become fearful and avoid market activity. Even worse, there’s often the temptation to sell.
Likewise, when markets are rising and funds start becoming more expensive, there’s an instinct that now is the time to buy.
Of course, it’s impossible to predict when the top and bottom of the market will be. It’s likely that, if you invest in a bear market, you will at first sustain some losses that will test your nerve. Conversely, if you take profits as markets are rising, you will often see prices rise further after you have sold.
However, with a long enough time horizon, you should expect to see positive results.
Consider that the people who profit most from a rising market are those who bought when the market was at its lowest.
If you were to walk past a shop window and see a display saying “50% off” or “buy one get one free” you would be tempted to buy. You should equally apply that logic to investing.
As ever, Warren Buffett has a saying
I would always strongly recommend that you see investments from a “value” perspective rather than cost.
A market when prices are falling is a “value” market. Prices are cheaper and, as you saw in the example earlier, you can buy more shares or units for your money.
Another way of looking at it comes from the legendary American investor, Warren Buffett. One of his most famous quotes suggests that investors should be “fearful when others are greedy, and greedy when others are fearful”.
It’s a counter-intuitive view, but time and experience have shown them to be wise words.
The important price is the one you sell at
Even if you’re nervous about the prospect of investing in a bear market, it’s worth remembering that they typically don’t last very long.
Historically, bear markets tend to be shorter than bull markets, withVanguardreporting that, between 1945 and 2020, the average UK bear market lasted just over a year. Compare this to the average bull market – when prices are rising – which lasted almost six years.
As a long-term investor, the only price that’s important to you is the one at which you sell. It’s why you should avoid the temptation to regularly check the value of your investments as this might only add to your stress and worry.
Bear in mind also that it’s unlikely you’ll be selling all your holdings in one go. With more options than ever for drawing a retirement income, many people are increasingly leaving much of their wealth invested even as they enter this next phase of their life. So, you may be able to ride out market uncertainty.
It’s also worth reinforcing that we design your financial plan with periods of volatility in mind. And, as you approach retirement, we’ll carefully consider your investment strategy during your annual planning meetings.
For example, the idea of keeping a cash buffer to provide income is precisely so you don’t have to sell your investments during a period of volatility, thus leaving yourself vulnerable to a shortfall in later life.
Get in touch
If you’d like to talk about the opportunities a bear market might offer you, or it’s time to review your financial plan, please get in touch.
You can call me on 07769 156 250.
