How to prepare for a bear market

Let me just clarify some terms. A correction is a decline of 10% or greater in the price of a security, asset, or a financial market. Corrections can last anywhere from days to months, or even longer. A bear markets occur when prices in a market decline by more than 20%, often accompanied by negative investor sentiment and declining economic prospects.

A correction occurs on average every two years and a bear market occurs every 4 years on average. As stated before a correction can last from days to months, but a bear market can be cyclical or longer-term. Cyclical bear markets can last for several weeks or a couple of months and longer term bear markets can last for several years or even decades. The longest bear market in history lasted for 25 years. During this time the market didn’t hit all time highs for 15 years where the average time to return to all time highs from a bear market is around 5-7 years. 

Thus when a bear market occurs we should be expecting our money to be locked up and indisposed of for 5 years at a minimum and 15 years at the maximum end, because this is the amount of time that you may be under water. We all need to plan for this and this is especially why money that is meant for spending within 5 years should not be placed in the stock market and it’s also why we should add bonds at least 5 years away from our deaccumulation phase.

So in essence, during next bear market it may take 6 months, 1 year or even over 15 years to hit market all time highs again and no one knows exactly how long it will take. This is one of the reasons why some people hate the stock market. It’s unpredictable.

If this is a major concern for you then consider diversifying your portfolio into bonds and cash flowing Real-estate. Don’t avoid stocks, just decreases your exposure to them; and of course make sure you have a good 6 to 12 month emergency fund.

Published by The Fire Investor

Financial Independence hobbyist offering practical wealth building advice for all income levels with a focus on achieving early financial independence.

Leave a Reply

%d bloggers like this: