Opportunity or threat? What you need to know about a bear market

In June, CNBC reported that America’s S&P 500 index fell into a bear market. This is where a stock index falls more than 20% from a recent high.

With the ongoing Covid pandemic, soaring inflation, rising interest rates and the war in Ukraine, the news is not that surprising. As clients of HarperLees Financial Planning, you have probably already spoken to us about what a bear market is and what it means for your investments.

While you may have seen your investments drop in value, it’s how you react to this reduction that typically determines whether it affects your wealth or not. Furthermore, there is a silver lining, as a downturn in the market could also be a shrewd time to consider investing your money.

Read on to discover whether a bear market is an opportunity or a threat to your wealth, and how we can help ensure your money remains on track to meet your financial goals. Before we do, let’s look at bear markets more closely.

Historically, there are fewer bear markets than bull markets

According to Vanguard, bear markets typically last for significantly shorter periods than bull markets, the latter being when stocks and shares rise in value. The fund manager reported that, in the UK, between 1945 and 2020 the average bear market lasted just over a year, compared to the average bull market, which lasted nearly six years.

Despite this, bear markets can lead to significant amounts of anxiety and fear. One reason for this is high levels of negativity in the media and financial press, which can heighten any feelings of doubt or worry.

As a result, investors can make knee-jerk decisions they later regret, which is why bear markets may be a potential threat to your wealth. For example, because of the negative media coverage, you may decide to sell your investments in an attempt to limit the level of losses your money could be exposed to.

Doing this will often lock in any losses your investment has made, as you deprive it of the potential to recover (or grow) when the market bounces back. That said, there is another, less obvious way that the fear created by a bear market could affect your wealth: it could discourage you from investing at a time when you may want to consider it.

This is something we will look at now.

A bear market could be good news if you’re looking to invest

While you might feel happier buying stocks and shares when the market is soaring and confidence is high, professional fund managers often prefer to purchase them during a market downturn.

As a downturn in the stock market means lower prices, savvy investors understand that there can be plenty of opportunity to buy high quality stocks for relatively low prices. To demonstrate this, consider the following illustration that shows the performance of the FTSE 100 in the last 25 years.

The index follows the performance of the top 100 companies by market capitalisation on the London Stock Exchange.

Source: London Stock Exchange

As you can see from the value on the right-hand axis, while the index rose in value during the period, there were three significant downturns. The first was in the early noughties for several reasons including the bursting of the dot-com bubble and 9/11 attacks, then in 2008 during the global financial crisis, and again in 2020 after the Covid outbreak.

During these downturns the value of stocks fell significantly, meaning you would typically have paid less for the equities you bought at the time. Because of this, you could have purchased more shares (or units) with your money, providing your investment with greater growth potential.

This is also true in 2022 as share prices have fallen across most developed markets. Investing now may mean you can buy more shares or units with your investment, potentially boosting your returns when markets recover in the future.

Always remember, though, that past performance is no guarantee of future performance.

Get in touch

If you are considering investing money that is not already with us, please contact us as we will confirm whether it’s the best strategy for you. We will also ensure you understand the risks and benefits it might provide.

Part of this includes reassessing your risk profile to ensure your money is exposed to as much potential growth as possible, while maintaining a level of risk you’re comfortable with.

If on the other hand, you want to discuss the volatile stock market of 2022 and what it could mean for your investments and wealth, please feel free to get in touch. You can email us at info@harperlees.co.uk or call 01277 350560, we’re always happy to help.

Please note

This article is for information only. Please do not act based on anything you might read in this article.

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.