Bear Markets Are a Regular Part of Investing

Bear Markets Are a Regular Part of Investing

With the U.S. stock market hitting more than 20 record highs this year, some investors have become nervous that we are due for a correction. Others worry we may be in an AI-induced bubble, given how high U.S. stock valuations appear.

It’s therefore instructive to look back at market history. Investing in stocks inherently involves risk; without risk, there is no return above the risk-free rate. Market pullbacks are a normal part of the investing experience.

A market correction (typically a 10%-20% decline) tends to occur on average every 1-2 years and lasts a few months.

A larger bear market (commonly defined as a decline of > 20 %) tends to happen roughly every 3-5 years on average, and historically lasts about 9-15 months from peak to trough.

While these corrections and bear markets can be nerve-wracking, market timing rarely works: it is very difficult to know exactly when to get out and when to get back in, and the biggest returns often come in the early days of recovery.

Instead, we navigate the volatility of investing and market corrections in the following ways:

1. We keep clients invested and use volatility as an opportunity to systematically rebalance, which causes us to buy what has gone down and sell what has gone up.
2. In steeper downturns, we look for opportunities to tax-loss harvest in taxable accounts, thereby generating a valuable tax asset that offsets future gains.
3. When it makes sense, we may suggest using the downturn as an opportunity for clients to do a Roth conversion, thus converting more shares at lower prices and locking in tax-favored future growth.
4. For clients with excess cash, we encourage them to use a market correction as a buying opportunity to deploy that cash into the market.

In summary: market corrections are a normal part of the investing experience. While they can be anxiety-provoking, experienced investors know that sitting tight and taking advantage of the opportunities presented by these pullbacks is often wiser than rushing for the exit.