A bear market is defined as a period when stocks lose 20% or more of their recent high values during a selloff. While they are inevitable features of modern markets, bearish periods can be stressful for investors. Investors today understand this all too well, as the S&P 500 officially entered bear market territory on June 13, 2022.
However, with a passive investing strategy, bearish periods can become much less intimidating and can be viewed as opportunities, rather than challenges. Here’s what you need to know about the power of passive investing in bear markets and how it can help you navigate these periodic downturns.
First, a Bit About Bear Markets
A bear market is one part of the two-part cycle of market booms and busts. On average, bear markets result in losses of just over 35%. The average bear market lasts around 15 months, though the duration depends on the factors that cause the downturn. Historically, bear markets occur about once every 56 months.
Every market has its own cycle of bear and bull periods. The U.S. stock market, for example, has had 27 bear markets since 1928. The deepest bear market on record occurred between 1931 and 1932, while the shallowest took place between 1948 and 1949.
Why Passive Investing Wins in Bear Markets
To recap, passive investing is the concept of buying and maintaining your investments for the long-term until they provide you with income, while being hands-off and minimally involved. This buy-and-hold approach allows you to put your money to work without stressing about day-to-day fluctuations, allowing compound interest to help your investments yield the biggest return over time.
Manage your Investment Mindset
Passive investing has multiple advantages during downturns in the stock market. Among the most important is that it lowers the stress on investors. When stock prices begin to drop rapidly, there is a fundamental psychological urge to avoid further losses by selling the investments. While most investors realize this is a poor strategy, emotions can cloud their judgement during market downturns. With a passive strategy that doesn’t require you to make active buying and selling decisions, you’ll be less likely to lock in any losses by giving in to fear.
Incur Lower Costs
Another advantage of passive investing is its low fees when compared to active investment strategies. Active investing requires you to pay fees with each frequent transaction, and these will add up over time. With lower costs, passive investments can provide superior returns during bull markets and mitigate the extent of losses during bear markets.
Benefit from Dollar-Cost Averaging
Passive investing also allows you to take advantage of dollar-cost averaging (DCA) when stock prices are low. If you contribute a set amount to your investments each month, you can actually buy more shares during bear markets. This results in a lower average cost for these shares and can raise your total long-term returns. These regular contributions can also be from automatically-reinvested dividends, which can yield very successful results during bear markets.
This also helps you avoid so-called “bear traps,” which are brief market rallies that occur during bear markets. These rallies can be caused by small pieces of positive economic news but are often fleeting. With dollar-cost averaging, investors can stick to a consistent strategy rather than trying to time the market and ride market waves that may prove to be bear traps.
Invest Easily with a Passive Strategy
If you want to take advantage of passive investing to make bear markets less frightening, SmartWealth by NBK Capital can help. SmartWealth already uses a long-term, buy and hold strategy with automatic dividend reinvestment, helping you invest for your financial goals. It makes it easy to get started, make regular contributions, and grow your money over time. With SmartWealth, you can make investing simple, passive, and low-stress, even during market downturns.
