Investing.com — Bear markets, characterized by declines of more than 20% in the Index, are often viewed with concern by investors, but they offer valuable lessons about market behavior and portfolio management.
According to analysts at UBS Financial Services, bear markets are an inevitable part of the investment landscape and not something to be feared or avoided.
Instead, investors should study bear markets to understand how they function and develop strategies to deal with the volatility they bring.
One of the first lessons from UBS’s comment is that while bear markets are disruptive, they are relatively rare.
Since 1945, markets have spent about 31% of their time in a bear market.
In contrast, most of the market activity (66% of the time) has been at or near all-time highs.
This suggests that while bear markets do occur, they are temporary phases in a much longer upward trajectory for stocks.
“On average, bear markets occur once every seven years,” the analysts said, meaning long-term investors are likely to experience several during their investing lifetime.
Furthermore, bear markets typically last only a short time. The average bear market decline lasts about a year, and a full recovery to previous market levels typically occurs within two to three years.
“Bull markets, on the other hand, last an average of ten years (from peak to peak), and some last for decades,” the analysts said.
While bear markets can be sharp and intense, their short duration emphasizes the importance of maintaining a long-term view rather than panicking during periods of increased volatility.
UBS analysts also emphasize that bear markets are painful but not necessarily dangerous unless investors react impulsively by selling their assets.
Historically, the S&P 500 has seen an average decline of 31% during bear markets, and it may take several years for markets to fully recover.
However, selling during a market downturn creates losses that would otherwise be temporary, a mistake many investors make out of fear or a desire to minimize short-term losses.
This type of behavior increases the risk of prematurely depleting portfolios and can undermine long-term financial success.
However, investors who stay true to their strategies can benefit from bear markets. Investors can benefit from adding to their portfolios during bear markets by turning return risk into an advantage.
By continuing to invest when prices are lower, investors position themselves to benefit when the market recovers, increasing the growth potential of their portfolio over time.
