What is a bear market and how does it impact my wallet?

Staci West 06/07/22 in Basics

The January Barometer, created in 1972, is the theory that stock market performance in January predicts its performance for the rest of the year. In other words, if the stock market rises in January, it is likely to continue to rise by the end of December.

It doesn’t work every year, but in 2022 it’s looking like the prediction could come true. In January the S&P 500 was down -5.58%*, and by June the US had entered bear market territory. By the half-way point of the year the S&P 500 was down -10.18%**. Simply put, markets aren’t doing great.

“Out of crisis comes opportunity. You make most of your money in a bear market, you just don’t realise it at the time.” — Shelby Cullom Davis, American businessman and investor

What is a bear market?

Put very simply, a bear market is the term used to describe a period of time when equity markets are down 20% or more from their most recent all-time high. A fall of this magnitude usually takes several weeks or months to occur.

Is a bear market another word for recession?

No. A bear market relates to a fall in equity markets, whereas a recession is defined as at least two consecutive quarters when an economy is contracting. That said, a bear market and a recession can occur at the same time. This is because bear markets often go hand in hand with a slowing economy.

Why would I invest in a bear market?

If markets are falling, it might seem like a bad time to invest. But it might actually be a great time to invest at a cheaper price. Stock markets may continue to fall, so you might not necessarily want to invest a big lump sum if your timing could be off. But you might consider investing smaller sums on a monthly basis or ‘buying on the dips’. Because as we have seen in the past, stock markets do recover over time.

As Darius McDermott told us on the Investing on the go podcast, focus on your long-term goals during this time. If you don’t need the money for 10+ years, it might be a good time to invest some of it as your money will have a longer time to “work” and compound. The longer your money is invested, the more likely it is to overcome any market ups and downs.

What does ‘buying the dip’ mean?

‘Buying the dip’ does not mean trying to time the market. It’s just about buying investments as they fall in price. When prices are low, your money can go further and buy you more units or shares, which could be worth more in the long run. Instead of trying to time the market, Juliet Schooling Latter recommends drip feeding into your ISA or pension through regular monthly contributions. Tip: make it an automated payment so you don’t have to give it a second thought.

Where should I invest?

Investing in an Elite Rated fund can help you stay invested for the long term. You can buy a core investment and then simply hold it, leaving the timing of stock buying and selling decisions to a professional manager.

A global fund allows you to diversify your holdings by spreading assets across different countries, sectors, and companies. The T. Rowe Price Global Focused Growth Equity fund invests in a diversified selection of companies around the world, including emerging markets. JOHCM Global Opportunities fund has a strong bias towards larger multinational businesses and the manager tends to be more cautious than many of his peers.

The Morgan Stanley Global Brands fund has a ‘don’t lose money’ mantra, which I think we can all agree is appealing. The fund invests in high quality and well-known names such as Microsoft and Visa***. Invesco Global Focus, a high conviction, concentrated portfolio, also holds familiar names, for example, Facebook, Mastercard and Amazon***.

Research all our Elite Rated global equity funds

Investors don’t need to wait for a bear market to invest at cheaper prices. Sometimes markets fall less than 20% but still offer good value. Sometimes markets look better value versus their peers.

For example, the UK market has long been overlooked and shunned by global investors. However, it can mean that investors looking to buy could benefit over the long term.

There are a number of different ways to invest in the UK. Investors looking for ideas in this market could consider Jupiter UK Alpha. It is a pragmatic and flexible fund, which is run by Richard Buxton, one of the most experienced and highly regarded investors in the industry. As the name suggests, ASI UK Mid-Cap Equity invests in medium-sized companies with growth potential and could be a good option for those looking for UK mid-cap exposure. Those looking for an income might consider a UK Equity Income fund: IFSL Marlborough Multi Cap Income, Man GLG Income and Rathbone Income all fit the bill.

Research all our Elite Rated UK equity funds

*Source: FE Analytics, total returns in sterling, 3 January 2022 to 31 January 2022
**Source: FE Analytics, total returns in sterling, 3 January 2022 to 1 July 2022
***Source: fund factsheet, June 2022

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.