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Top tips for surviving a bear market

Not far from Wall Street, near the beating heart of the financial world, is a famous statue. The Charging Bull, or the Bull of Wall Street, symbolises financial prosperity and optimism. It is fierce and energetic, much like the market at times.

Right now in the USA, the place from which much of the world draws its economic lead, the sharemarket is up and sentiment seems bullish - not unlike the nation's new president.

But a bull, while strong, is also unpredictable. And few could deny that President Trump has introduced an element of unpredictability to the global economic stage.

Although stocks have rallied strongly from their sharp tumble when Trump was first elected, there are concerns amongst some observers that this might reverse at some point. Given the array of political and economic risks looming on the horizon, there is always a possibility that the current “bull market” could revert to a “bear” or down market.

We should emphasise that Six Park currently has a positive outlook for global share markets in general. We are certainly not expecting an imminent major market collapse. That said, markets are inherently unpredictable. As such, we think it’s important that investors always consider how they might react if/when markets drop.

What exactly is a bear market? Well, if a bull encourages prices up, a bear swipes them back down again. A bear market is typically defined as a drop of 20 per cent or more from the market high, and the average length is just less than a year. The US S&P 500 offers a good overall example of general market cycles. As the table below shows, the S&P 500 has experienced 15 bear markets since World War II. The largest was the GFC in 2007-2009, and the most recent back in 2011 when fears of a debt crisis across Europe and a downgrading of the USA’s credit rating spooked investors.

Like anything in finance, bear markets are hard to predict. Markets are a complicated mix of sentiment, global conditions and local events, and the way those factors come together changes from day to day. When a market downturn inevitably hits again (sadly bear markets are an unavoidable part of investing over the long term) here are some top tips to remember:

  1. Be prudently diversified: Stocks rise and fall, and smart investors don't assume their assets will constantly rise in value. Instead they protect against periodic losses with a mixed portfolio of asset classes that reflects their appetite for risk. A suitably diversified portfolio of higher and lower risk assets will help buffer the impact of bear market cycles, which don’t last forever. Higher-risk assets such as shares tend to drop more during a bear market, but they’re also the ones most likely to climb in value when markets inevitably recover. Defensive assets such as bonds and cash yield tend to offer greater protection during a bear market but are unlikely to deliver rapid growth at other times. The right diversification amongst these asset classes will depend largely on your risk appetite and investment time horizon. If you don’t know whether your investment portfolio is suitably diversified, get clarity and details from your financial advisor, or use one of the many tools or services available to assess a prudent asset allocation (such as Six Park).

  2. Don’t panic: A common mistake investors make is to fret through the early stages of a bear market, panic and sell at or near the bottom of the cycle, then re-enter the markets after they’ve started their natural recovery. Generally, bear markets shouldn’t lead long-term investors to dramatically shift their asset allocations. Considering any changes to your life situation (such as having a child, getting older, losing your job or retiring) is more important than trying to time the markets as they go through their natural ups and downs. (Read more about the pitfalls of market timing here)

  3. Leave it to the experts: If you use a financial advisor or service like Six Park, trust that the experienced professionals making market judgments will know when/if to adjust asset allocations. At Six Park, we have more than 200 years of asset management experience and an Advisory Board that has overseen investment strategies and asset allocation decisions at the highest level. Let the experts who have experienced multiple cycles of bull and bear markets worry about how to respond to market gyrations. Six Park’s robo-advice platform provides a disciplined platform to help investors resist the emotions associated with a bear market and stay the course with their investment strategies. Guided by the deep expertise of our Advisory Board – and aided by our sophisticated algorithms (which don’t respond to worrying news reports but rather use data to work out what’s most likely to happen next), we can help investors avoid the pitfalls of emotion-driven decisions whilst providing the most rational and prudent approach to reaching their longer term investment goals.

No matter who’s managing your investments, remember that while you can't control the market's movements, you can influence the way you respond to them.

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