Plunging stock prices in a bear market can leave a sour taste in the mouth of retirees who rely on their investments to help fund their lifestyle. But instead of bailing out of the stock market at the wrong time or wallowing in your financial misfortune, a better strategy is to turn a lemon market into lemonade. “There are a few things investors can do to take advantage of potential opportunities in a down market,” says Brian Walsh, senior manager of financial planning at online financial company SoFi.
What you don’t want to do is panic and harm your long-term finances by making portfolio moves driven by fear and emotion that will put you deeper in a hole, says Jerry Braakman, president and chief investment officer at First American Trust. What’s past is past. Your job is to minimize the damage of the market downturn and look ahead. “You want to position your portfolio for the market’s next phase,” Braakman says.
Remember, bear markets eventually end. History tells us that stocks do eventually recover.
In the post-World War II era, the 10 garden-variety bear markets, or ones in which the S&P 500 stock index declined 20 to 40 percent, have lasted an average 10 months and brought average declines of 27 percent. More importantly, the market has typically fully recovered in 14 months, according to data from CFRA Research.
So, what’s an investor to do?
1. Buy stocks on sale
A bear market marks down stock prices from expensive to cheap. At the bear market low in mid-June 2022, for example, the S&P 500 was down nearly 24 percent from the start of the year. And that Wall Street discount amounts to a big sale, no different than massive markdowns during Black Friday holiday sales.
So, avoid selling stocks at depressed prices and locking in losses. Instead, consider buying shares of beaten-down quality companies that sell popular products. You’ll be taking advantage of lower prices and the eventual rebound, says Falko Hoernicke, senior portfolio manager at U.S. Bank Private Wealth Management. “You’ll probably find some hidden treasures,” Hoernicke says.