Investing.com — Bear markets, characterized by declines of more than 20% in the Index, are often viewed with trepidation by investors, but they provide valuable lessons about market behavior and portfolio management.
According to analysts at UBS Financial Services, bear markets are an inevitable part of the investment climate, not something to be feared or avoided.
Instead, investors should study bear markets to understand how they work and develop strategies to navigate the volatility they bring.
One of the first takeaways from the UBS book is that bear markets, while disturbing, are rare.
Since 1945, markets have spent about 31% of the time in a bear market.
In contrast, the majority of market activity—66% of the time—was spent at or near all-time highs.
This suggests that, although bear markets do occur, they are temporary phases in a very long upward trajectory for stocks.
“On average, bear markets happen once every 7 years,” say analysts, meaning long-term investors are likely to experience fewer during their investment career.
In addition, bear markets tend to last only for a short period of time. An average bear market downturn lasts about a year, and a full recovery from previous market levels usually occurs within two to three years.
“In contrast, bull markets last an average of 10 years (from peak to peak), and some persist for decades,” analysts said.
Although bear markets can be sharp and severe, their short duration highlights the importance of maintaining a long-term view rather than panicking during periods of extreme volatility.
UBS analysts also emphasize that bear markets are painful but not necessarily dangerous unless investors react rashly by selling their assets.
Historically, the S&P 500 has seen an average decline of 31% during bear markets, and it can take several years for markets to fully recover.
However, selling during a market downturn is key to potentially short-term losses, a mistake many investors make out of fear or a desire to minimize short-term losses.
This type of behavior increases the risk of early liquidation of portfolios and can undermine long-term financial success.
Investors who remain committed to their strategies, however, can take advantage of bear markets. Investors can benefit from contributing to their portfolios during bear markets by turning the risk-return sequence into profit.
By continuing to invest when prices are low, investors position themselves to benefit when the market rebounds, which improves their portfolio's growth potential over time.
