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US Market

Stay Invested or Sell in a Bear Market?

Calvin Lo

What a dismal start to the month of May (and the year 2022 in fact). Selling has accelerated the past week. S&P 500 is down around 17% from its peak and fast approaching bear market territory.

With sentiment souring and losses snowballing, should investors sell to avoid more losses in anticipation of a bear market or stay invested in hopes of a rebound?

The first question that comes to my mind though, is how long do bear markets last and how much further can we expect to fall?

This neat little chart from Invesco can help put things into context. Invesco has also published an even more detailed study into bear markets and recessions here, if you’re interested to dig deeper.

Source: Invesco

The first thing you might notice is that there’s a lot more green than red. Human nature if a funny thing though, we tend to feel the pain more acutely than joy. Or maybe we do feel the joy but forget real fast once we’re in pain.

Let’s look at the stats. The average bear market last ~12 months and ranges widely from 2 to 21 months. As for the drawdown, the average is -34% but can range from -27% to -52%.

Currently, the S&P 500 has not technically fallen into bear market yet although it definitely feels like we’re in one. Also, the Nasdaq has fallen into bear market down -25% from its peak already.

However, assuming S&P 500 does fall into bear market we can expect another 17% drop from here on average (only an indication based on historical data, not a sure thing). Since we have been in decline only for 4 months since the start of 2022, we can expect on average another 8 more months of declines.

If you have a long investment horizon though, one year of declines shouldn’t bother you much. It may seem like doomsday now, but it might just look like a blip 20-30 years from now.

The biggest risk about selling now and giving up on the stock market is to miss out on the next bull market, which on average lasts 55 months and returns +154%!

Maybe you’re thinking it might be a better idea to just wait until we’re back in a bull market to start investing, but that requires you to monitor the markets closely and time your purchase perfectly.

By the time you’re sure of a bull market, you might miss out on quite a bit of gains before you manage to get back on the bandwagon.

You might also end up regretting not buying at lower prices as stocks start to rise significantly, delaying your buy in if you decide to wait for dips then.

As the saying goes, time in the market beats timing the market.

Another thing to note about the chart is that the data is based on S&P 500 index, which tracks the top 500 largest companies in the US by market cap.

If you’re invested in smaller companies outside the S&P 500 index, e.g. high-growth, SPACs, meme stocks, etc., this data might not apply.

One caveat and the only reason I see to potentially sell is if you had invested into highly speculative, low-quality stocks during the euphoria and hype of 2020/21. If so, you might need to take a long hard look at those stocks and take the tough decision to cut them loose before they cause more damage to your portfolio.

Other than that, I think it’s wise to keep your eyes fixed on the long term and big picture. If you have the patience and stomach for volatility, now might be a good time to start averaging into growth stocks which have been beaten down hard.

No one will blame you either for buying inflation hedges or defensive stocks to blunt the shorter term volatility.

Otherwise, stay calm and just hold. Make sure and double confirm that you’re comfortable with the risk profile of the stocks in your portfolio.

We’re already in a period of heightened risk and volatility. The path of least resistance is still down, so make sure you’re prepared for that.

We can’t control how the market moves, so focus on what’s within our control – our asset mix, quality of individual holdings, and position sizing.

The down trend will eventually reverse, regardless of whether we fall into a bear market S&P 500 or not.

Personally, I’ve been averaging down in index funds VT and QQQ but also reserving a cash buffer in case of further declines.

So stay the course, stay invested but don’t be a hero.

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Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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