The key to making money in stocks is to not get scared out of them.

– Peter Lynch

While we all prefer bull markets, it’s no secret that bear markets play an active role in these cycles. Knowing how to react and adjust to both can make all the difference to your personal finances. Individuals without professional guidance seem to think taking a backseat during these perilous times is the best option available, but truthfully, conditions such as these are when you should be most involved with your portfolio. Your current decisions can (and most likely will) have a significant impact on your future financial security. Before we address some of the more advanced tactics for mitigating risk and navigating economic downturns, let’s address the bear in the room: what exactly is it?

Bear Market Fast Facts

What happens during a bear market?

The general rule of thumb for defining this stage of the investment cycle is when an index falls by 20% or more from its recent high. The results of this downward spiral can vary, but it’s often accompanied by negative investor sentiment and panic.

What causes a bear market?

There is no definite answer, but it can range from the one-off pandemic to more regular causes such as interest rate hikes aimed at tackling inflation. Wars, trade embargos, and market bubbles can all play a role in waking the bear.

How long do bear markets last?

Although they differ from one to the next, historical data from 1929 to 2021 suggests that bear markets last for an average of 289 days. Some have been as short as 33 days, whereas others have lasted over a year.

How can I get through a bear market?

That’s what you’re here to find out. Think long-term, diversify, consider defensive sectors, look for quality stocks with a strong history of raising dividends, and above all else, consider contacting a professional Family Wealth Manager. 

Play the Long Game

Time horizons may differ from person to person, but the common denominator for everyone is the market itself. History shows that these economic slumps are short-lived in comparison to the upswings that follow them – more importantly, a longitudinal study suggests that bears are ending sooner, whereas bulls are lasting longer.

In a study put forward by Gonzales et al, it was noted that over the past two centuries bear markets have become progressively shorter, whereas bull markets have started to last longer, on average.

Another aspect to be wary of is the change in stock price. According to a study put forward by Ned Davis Research, stocks have seen an average cumulative loss of 36% during bearish environments, which is completely overshadowed by the 114% average cumulative gain during bull runs.

Market volatility and fears of a recession are among the most difficult tests of an investor’s resolve, but time and time again it has been proven that holding fast to your investments through difficult conditions is one of the best things you can do for your portfolio. Will Beacham, a Bellwether portfolio manager, suggests that “timing the market is a recipe for disaster” for inexperienced investors, often leading to “disappointment once they realize they’ve missed the early stages of recovery.” Letting panic influence your financial decisions usually ends in regret, as short-run losses are not an indicator of long-term growth.

Investing has always been a long game, but it becomes significantly harder to win if you sit out the fourth quarter.

Diversifying Your Investment Portfolio

Growth stocks. Bonds. Mutual funds. Certificates of deposit. Dividend yields. With so many options to choose from, it can be daunting to pick one that will serve you best. But the key is to not rely on a single category and let them complement one another. Chris Jardine, a Bellwether Family Wealth Manager, says that diversification is a “concept that never gets old, and for good reason.”

A diversified portfolio is something we suggest under most circumstances, but it can be particularly useful to help soften losses when the charts are down. Bear markets have a knack for volatility, which often sends most stocks in an index tumbling – but holding an array of equities can rebalance the winners-to-losers rate. Another option to consider is investing in international assets, which may not be impacted to the same degree by domestic market conditions.

Beyond mixing up your equity selection, looking toward more stable asset classes can provide a level of security against unfavourable market conditions. Having access to institutional and private investment opportunities can help safeguard your capital, as they are usually more resilient to market volatility by virtue of being unavailable to the average investor. Jardine urges clients to “consider alternative strategies as part of their overall asset allocation” before remarking that “as this year has shown, simply holding a mix of stocks and bonds doesn’t always work out.”

As stated earlier, diversification is something that should be built into your financial plan regardless of how the market is behaving. But that doesn’t mean you can’t readjust your portfolio during a slump to better situate yourself, your family, and your future. Fortune favours the prepared, and you should see this as a chance to address imbalances.

Consider Investing in Defensive Sectors

Shifting from growth stocks to more defensive sectors can be a sound decision during a bear market. According to Jardine, the Healthcare, Consumer Staples, and Energy sectors are more resilient to downturns and tend to outperform indices because “people still need essentials to live – high-quality companies that provide these products see relatively little change in demand” during bear markets.

Sales for the latest sports cars vary from year to year, but the need for electricity to power your home or food to set the dinner table doesn’t fluctuate nearly as much. Inflation or not, people still get sick and need gas to get to their appointments. Beacham’s analysis supports this idea, acknowledging that “certain Healthcare, Staples, and Utilities exchange-traded funds are down less than half as much as the S&P 500, year to date” at the time of writing.

Everyday necessities have proven to be relatively inelastic during recessions. Parking your capital in these sectors, for the time being, can protect you from some of the more drastic price swings common to other industries.

Invest in High-Quality Dividend Stocks

Taking bets on unproven companies during a bull market is risky enough, but doing so during an economic downturn is often outright foolish. Basing investments on hot tips about junior businesses where profitability is years away, if ever, may not be the greatest idea.

It is critical to aim for strong fundamentals when the market starts to spiral. Prudence is a priority for Jardine, and he specifically looks for “large companies with strong balance sheets that pay regular dividends.” There’s nothing wrong with “getting paid to wait while the market fluctuates” and providing yourself with a steady stream of income in the meantime.

Not all dividends are created equal, however. Our analysts have investigated the past and present performance of different dividend-paying stocks, and their work has shown interesting results. Their findings suggest that those with a pattern of increasing dividends per share (DPS) often outperform their competitors. Furthermore, companies that have room to grow their DPS in the coming years may offer a far better risk-adjusted return over longer time horizons. In a market where stock prices are in flux, dividend yield strategies can provide a level of comfort and certainty about your finances.

With the benefit of hindsight, we can peer into the past for trends in more recent recessions. According to research put forward by New Constructs, the companies that performed well during the 2008 Global Financial Crisis had a common thread between them: they all earned a consistently high return on invested capital (ROIC). Used to gauge a company’s profitability ratio, a high ROIC reflects how much value a company is creating relative to the amount of capital put forward by investors. In other words: it proves to be a good marker of how efficiently a business is using investors’ funds to generate income. Under harsh market conditions, the effective use of investment capital becomes a critical skill for companies looking to survive.

Taking a focused approach to finding companies that are both capital-efficient and willing to increase their dividends during a bear market can help you eliminate the noise and target stocks that are more likely to drive higher equity returns.

Private Family Wealth Advisors

Ideally, it shouldn’t be you staying up late over the weekend trying to map out macroeconomic conditions, parsing through dozens of stocks, or constantly rebalancing your portfolio during volatile times. Even if you are, there is no guarantee you’ll come out on top. Jardine goes on to acknowledge how “incredibly difficult it can be to open your monthly statements only to see your life savings seemingly melt away” every thirty days.

He does, however, address the fact that you don’t have to. You can find a “professional wealth advisor who can help guide you through the turmoil and ensure you don’t do anything rash that would cause more harm in the long run.”

Hopefully, these investment tips can help you navigate the bear market until it goes back into hibernation. This only scratches the surface of the strategies our professional wealth managers are equipped with to better protect our clients’ assets in uncertain times. If you’re interested in having them do the same for you, book a free portfolio review today to set yourself up for success.


Free portfolio review


© Bellwether Investment Management Inc. 2024. This communication is intended for residents of the provinces in which we are registered and is not meant to be a solicitation to any persons not resident in those provinces. Any opinions expressed in this article are just that, and are not guarantees of any future performance or returns. Some of the information contained in this article has been drawn from sources believed to be reliable but due to the fact that it is provided by a third party, it cannot be guaranteed to be accurate or complete. Bellwether Investment Management Inc., Bellwether Estate and Insurance Services Inc. and Bellwether Family Wealth cannot provide tax advice and therefore we recommend that you consult your tax advisor for further assistance with your tax planning and the preparation of your tax return. The report is prepared for general informational purposes only and the securities mentioned in this report should not be construed as a recommendation for any specific securities.

Popular Posts

New call-to-action