If a Bear Market Is Coming, History Says This Strategy Will Set Investors Up for Long-Term Success
Key Points
Historically, 20% of bear markets occur roughly once every four years.
Investors with long-term strategies should resist the urge to sell after stocks have declined.
Continuing to dollar-cost average into 401(k) plans can take advantage of low share prices before a recovery.
Bear markets often show up out of the blue and without warning. Consider the current correction we're seeing in semiconductor stocks. Both the VanEck Semiconductor ETF and the iShares Semiconductor ETF are roughly 20% off their highs set only around a month ago. A lot of investors thought that artificial-intelligence-driven stocks would keep rising indefinitely. But they're vulnerable to pullbacks like anything else.
Historically, 20% bear markets in the S&P 500 (SNPINDEX: ^GSPC) happen about once every four years. Losses of 30% or more have occurred around once every 10 years. Every single time, the index has gone on to eventually set a new high. Whether your personal portfolio establishes new highs, however, depends on your discipline and what you do when stock prices are falling.
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Why selling after stocks have fallen usually makes the situation worse
Take these two historic bear markets:
- During the 2008 financial crisis, the S&P 500 lost 57% of its value from peak to valley. Investors who sold at or near the bottom in March 2009 locked in those losses and probably remained out of the market until long after the recovery began.
- The 2020 COVID-19 crash saw the S&P 500 drop by more than 30% in just a few weeks. A lot of folks were probably told that the economy was about to come to a complete halt and decided to sell, again locking in losses. Those people likely missed out on the sharp and sudden rebound that pushed the index back to a new high by August.
In both cases, investors who sold low and stayed on the sidelines permanently damaged their long-term returns. Long-term investing involves staying invested through market declines since you have years to recover, in theory. But if you act during those times, you're very likely to come out behind.
Dollar-cost averaging can help investors take advantage of declines
On the other hand, staying invested AND continuing to make scheduled periodic investments, such as into a 401(k) plan, can actually help you come out ahead during a bear market.
That's because you're buying shares at lower prices than you might see again after the recovery has begun. Once a new high is eventually established, you would, in theory, recover everything you'd lost. But you'd also see gains on all of those purchases you made during the bear market.
Investors who resist the urge to take action are often the ones who do best in the end. Bear markets are scary. But if you maintain composure during and focus on your long-term goals, they can be situations to take advantage of instead.
David Dierking has positions in iShares Trust-iShares Semiconductor ETF. The Motley Fool has positions in and recommends iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.