If you started investing during the COVID-19 pandemic, you’d have experienced exhilarating market highs: the FTSE All-World Index rose by 16.7% in USD terms in 2021, while the S&P 500 gained 26%, hitting record highs 68 times in the year. And if you had stayed invested, you might also have also experienced your first bear market in 2022.
If there’s only one thing you take away, it’s that the best way to weather any market downturn is to stay invested. That is, continue investing regularly into a well-diversified portfolio. We explain more below.
Many different terms get thrown around when markets are down, and they all mean slightly different things. Here’s a quick primer:
A market downturn refers to a period of time during which the stock market experiences negative returns. Market downturns can develop into market corrections or bear markets, depending on the degree of the stock market decline.
A market correction happens when a stock market sees a decline of between 10% and 20%. Corrections are usually relatively short-lived, with recoveries taking four months on average.
A bear market is commonly used to describe a prolonged period of market declines and investor pessimism. We typically say we’re in a bear market when a stock market falls by 20% or more from its recent high. And we saw this happen in June 2022, when both US and global stock markets fell into bear market territory.
During market downturns, some investors may panic and begin selling their investments to prevent their portfolios from experiencing further losses. But here’s why panic selling is a bad idea.
In theory, pulling out your investments when markets are falling could seem like a good idea, because you avoid any future losses. However, the truth is that continuing to invest when markets are down gives you the opportunity to pick up securities at a cheaper price, maximising your gains when the market eventually rebounds.
Markets are unpredictable, and timing the market is nearly impossible. Even if you follow the news, headlines are usually still very pessimistic at market bottoms, and rebounds often happen quickly before the media can even report on them.
The chart above shows what just one month out of the market could cost you. Investor A stayed invested through the COVID-19 stock market crash and subsequent rebound, while investor B panic-sold at the market bottom, held cash, and re-entered the market a month later.
While both investors started off with a portfolio size of $100,000, investor A would have broken even by the end of August, while investor B’s portfolio would still be down 15% from the start of the year.
Looking at bear markets in the S&P 500 Index over the past 100 years:
The length of time between bear markets is 3.6 years on average. That means that bear markets aren’t exceptional, so you shouldn’t make your investment strategy dependent on them.
The S&P 500 Index has experienced 26 bear markets since 1928. Despite this frequency, stocks have risen significantly over the long term.
Bear markets are shorter-lived than bull markets: The typical length of a bear market is about 9.6 months, while bull markets last for an average of 32 months.
Market downturns, market corrections, and bear markets have been, and will continue to be, normal parts of an investor’s journey. The good news is that historically, markets have always bounced back.
We know this is easier said than done, but the best way to weather any market downturn is, in fact, to keep investing – even if the downturn becomes a bear market.
If you’re a long-term investor, keeping your funds in the market saves you from the nearly-impossible task of timing a market recovery. We’ve seen that recoveries can happen rapidly, and missing out on them can hugely impact your long-term returns.
Maintaining a diversified portfolio also helps in periods of market volatility. Spreading out your investments across various asset classes and geographies helps to smooth out your returns over the long run, protecting your portfolio from the risk of large declines in any single asset.
You can read more about long-term investing strategies that work in all market conditions.
Learn more about how you can invest into diversified portfolios that’ll help weather any market downturn:
StashAway Malaysia Sdn Bhd (201701046385) is licensed by the Securities Commission Malaysia (Licence eCMSL/A0352/2018).