Throughout my money management career spanning nearly thirty years, I have experienced bear markets, on average every five years. A bear market is defined as a correction of 20% or more.
My experience managing money for my family and clients all this time closely matches the historical record of a bear market occurring every five or six years. Having survived multiple bear markets and some severe corrections helps me maintain my long-term objectives and strategy. Nonetheless, each bear market is painful and as the market is falling, it often feels like there is no end in sight. Even as the market is climbing back from the low point, there are always experienced predicting “the worst is yet to come.”
History and experience have taught successful investors that bear markets have always ended and the patient investor is eventually rewarded. Many of the best opportunities to invest occur in the depths of a bear market.
Lessons from Past Bear Markets
What lessons can we learn from the past to help investors survive the inevitable future bear market?
As reported in the Wall Street Journal, at the market low in October 2022, the U.S. stock market was down about 25% from its peak at the beginning of that year. 2023 had a rocky start with gains one month and losses the next but has steadily gained since the middle of March to bring us out of last year’s bear market. We have emerged with significant gains weighed heavily toward technology related stocks. Much of the gains have been concentrated in the biggest companies that lead their sectors including Amazon, Apple, Google, Microsoft, Meta, Nvidia, and Tesla.
However, from the beginning of last year through the middle of this year, these companies only have a slight gain and if the biggest gainer, Nvidia, was excluded, they would still be at a loss. Chasing after the hottest performers is not a winning strategy. The biggest winners this year lost an average of 46% last year according to data reported in Morningstar.
When the market is having a correction or is in a bear market, many investors assume that their portfolio is losing the same as the market. If their friends are complaining about losses, they assume they are losing similar amounts. If the media reports how bad things are, they assume their portfolio is suffering as bad and may make a poorly timed decision to get out.
Some strategies made money last year and investors who heavily invested in dividend paying stocks would have held up fairly well relative to the market and possibly gained for the year. For example, the iShares Select Dividend exchange traded fund (ETF) invests in relatively high dividend paying stocks and had a positive year last year.
The market is made up of thousands of companies. Some are newer fast-growing businesses that may not be profitable and are considered risky due to the high volatility of their shares while some are well established companies that have a long track record of revenue, profits, and dividend history and those are considered less risky.
Is there a Best Bear Market Strategy?
The role of a financial advisor, especially one who is a fiduciary, is to help protect client money while making strategic decisions to earn a good long-term return. It makes sense to own some of the leading growing companies, but except for the most aggressive 
investors, those should not make up an entire portfolio. Diversification is key. Someone balancing their portfolio between growth companies and higher dividend paying companies would have suffered losses last year but much more modestly than the overall market.
In the short term, you can’t have it all; no losses in bad market years and only market-beating gains in the good years. But in the long run, having a diversified portfolio including growth-oriented holdings and income-oriented holdings for many is the best strategy. By mitigating losses in a bad year, more investors can weather the inevitable bear markets that occur every five or six years.
Being in the market doesn’t necessarily mean you are “in the market” if your investment portfolio strategy differs from the broad market as the high dividend strategies performed very differently than the overall market in 2022.
Large U.S. based companies have been leading the market for most of the past fifteen years but there are times when international companies’ shares outperform domestic ones. There are times when small companies outperform large companies. Further diversification into fixed income securities sometimes makes sense although losses in bonds in 2022 did not provide shelter from the market decline that year.
Opportunities and Diversification
Direct ownership of real estate can fit into an investment portfolio as another way to diversify and protect capital. After a long period of extremely low returns, money funds are paying over 4% and short-term FDIC insured certificates of deposit (CDs) are paying 5% 
or more. Reserve funds sitting in bank accounts earning very little can be moved to money funds or short-term CDs for their fixed returns.
Owning a diversified portfolio that generates a growing stream of income from stocks and real estate has been a great way to build long term wealth through bull and bear markets. History teaches us that bear markets last less than a year on average.
If your investments are properly diversified, your best bet is usually to stay invested and wait out the volatile period in the market. With the right diversification, going into the bear market with a reliable stream of income generated from your portfolio will make it easier to remain invested. Giving up on stocks during a bear market can be a big mistake. And if funds are available, it’s a good idea to take advantage of the bargains and invest.
