Many times opportunity comes wrapped inside a scary situation, dealing with hardship, or simply accepting change. But nearly every time it ends up requiring a person to step outside themselves and take the proverbial leap of faith.
What is a bear market?
It is an opportunity—and it is scary, it is a hardship, and it requires taking a leap of faith.
What is the conventional definition of a Bear Market?
The Securities and Exchange Commission defines a bear market as a period of at least two months when a broad market falls by 20% or more. The Standard & Poor’s 500 index, which includes virtually all of the largest and most well-known U.S. companies, is in an “official” bear market since its peak on January 3, 2022. Since 1928 there have been 26 bear markets with an average length of 289 days.
No doubt about it, psychologically a bear market can be challenging. The impact can be particularly hard for investors who do not have a well-designed plan as they see their retirement accounts and investment portfolios shrink. This can create a self-fulfilling cycle, as investors who perceive an impending bear market tend to sell even more, pushing prices down further and prolonging the pain—what psychologists call a “negative loop cycle.”
What is the good news and what opportunity might a Bear Market provide?
For investors who have psychology and time on their side, a bear market can offer:
- The opportunity to buy companies, sectors, industries, or the overall market at a price below intrinsic value. This can provide substantial wealth.
- Tax-loss harvesting opportunities.
- Traditional IRA-to-Roth IRA conversions.
- Increasing your contribution amount.
- Rebalancing opportunities.
During a bear market, there are quite a few things an investor might do. Probably the most important idea you might consider changing is the nomenclature from “Bear Market” to “Opportunity Market.”
-Paul R. Rossi, CFA