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When your investments look like they’re heading for bear market territory it might be tempting to offload assets before things worsen.
But should you really sell stocks during a bear market? Or is it best to consider sliding stocks as an ideal buying opportunity?
Keep on reading for all the details or click on a link to head straight to a section…
A ‘bear market’ is typically called when an investment falls at least 20% over the course of two (or more) months.
While bear markets are commonly used to describe falling share indexes, an individual stock can also enter a bear market, as can other types of assets, such as cryptocurrency, housing, or precious metals.
Bear markets are often accompanied by negative investor sentiment, and/or general pessimism about the health of the economy. This is why bear markets often occur during challenging economic times.
It’s worth knowing that bear markets may last for a short, or long period. During particularly challenging times, it’s possible for a bear market to drag on for years, or even decades.
The opposite of a bear market is a ‘bull market.’ This is where stocks rise for a sustained period.
Now you know what a bear market is, let’s take a look at which sectors may currently be in one.
While stocks and shares have had a rough time of it lately, UK stocks aren’t technically in a bear market right now. This is mainly because major stock market indexes have enjoyed a mini-resurgence over the past month or so, with both the FTSE 100 and 250 enjoying a 3.5% rise since early November.
Despite this however, the FTSE 100 is up a pitiful 0.45% since the year started. Meanwhile, the FTSE 250, has fallen 19.5%.
And while neither index is currently in a bear market, the FTSE 250 has been for the majority of 2022. Between January and October this year the FTSE 250 had slumped 30%.
Across the pond the S&P 500 fell 27% over the same period. Incidentally, this is the first time the American share index had entered a bear market since the emergence of Covid-19 back in March 2020
Similar to UK stocks and shares, the S&P 500 had a decent November, with the large-cap index rising over 5%. As a result it’s no longer in bear territory… for now.
It’s been a year to forget for bond holders, with wobbles in the global economy sending prices slumping and yields soaring. As a result, we’ve seen the bond market encounter its first bear market in over 70 years.
You see, bonds rarely fall by as much a 20%. That’s because they’re traditionally seen as one of the safest asset classes. This is why many pension funds buy bonds – particularly Government bonds (gilts) – in order to diversify holdings.
The commodity market hasn’t managed to escape global economic turmoil this year either. At some point this year oil, gas, copper, gold, and silver have all fallen by at least 20%.
When we take a look at a performance chart for the S&P GSCI Commodity Index – a benchmark for the commodity market – we can see that the index fell from 816 to 593 between June and September. That’s a 27% fall. Meanwhile, the index is down 28% over the past six months (May to November 2022).
The cryptocurrency market has seemingly had a meltdown in 2022, with the performance of all major digital coins meeting anyone’s definition of a bear market.
Bitcoin – the most well-known cryptocurrency – is down by more than 60% since the year began, suffering its biggest fall in early summer.
Ether (Ethereum), meanwhile, is down 63% since the turn of the year. On a similar note, Binance Coin – the third-largest cryptocurrency by market capitalisation – has lost 39.5% of its value
The housing market is notoriously unpredictable at the best of times.
According to the latest Nationwide House Price Index the average home now costs 4.4% more than a year ago. Yet the same index also suggests house prices will soon witness a “sharp slowdown” and it’s not difficult to understand why.
Nationwide’s data suggests the average property price was £263,788 in November, compared to £268,282 in October. That’s a 1.4% fall. Still a long way off a bear market, but many analysts are now predicting that property has much further to fall – especially as the impact of higher interest rates may take time to be reflected in the data.
Your attitude to bear markets will probably be based on your overall investing mindset. So let’s break down the question of how you should invest in a bear market, based on your investing style.
It’s normal to be concerned about the value of your portfolio falling, regardless of your investing style.
However, if you’ve a long-term investing mindset, then you should recognise that falling asset prices is simply part and parcel of investing. Remember, one of the main reasons for investing over the long-term is that your portfolio will be able ride out any short-term bumps along the way.
So if you’re in it for the long-term, seeing your portfolio slide probably shouldn’t impact your investing strategy. This means if you passively invest – let’s say you put £200 per month into a passive index tracker – you should probably continue doing so, even if your investments have dived.
In fact, if you do continue investing after falls, your fixed monthly payment will be picking up investments at a lower cost. This is the main advantage of taking a pound cost averaging approach, where you invest regardless of the health of the stock market.
Active investing is an approach taken by investors who fancy their chances of beating the market.
This is why, for active investors, a bear market may seem like the ideal opportunity to buy. After all, when stocks have fallen, they’ll be ‘for sale’ at a reduced price.
There’s nothing wrong with this mindset, and the presence of active investing is why short selling and inverse exchange-traded funds are a ‘thing.’ However, if you are an active investor, it’s worth bearing in mind that just because the value of a stock, or other asset, has fallen, there are no guarantees that values will recover. A stock or asset that has already fallen may have further to fall.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. Capital at risk.
Cryptocurrency is not regulated by the UK Financial Conduct Authority and is not subject to protection under the UK Financial Services Compensation Scheme or within the scope of jurisdiction of the UK Financial Ombudsman Service. Investing in cryptocurrency comes with risk and cryptocurrency may gain in value, or lose some or all value. Capital gains tax may be applicable to profits from cryptocurrency sales.