Bear markets can be unnerving times for investors, but history has shown playing the long game pays off.
When markets become volatile, investors naturally become nervous about the performance of their investment portfolio.
This discomfort is often compounded by occasional murmurings of a recession, uncertainty with the path of interest rates and conflicting opinions in the media.
A rising market or a headline-grabbing stock can instill fears of missing out. Likewise, periods of price consolidation or falls can create unease and thoughts of waiting to invest.
“Post-Covid-19 supply-chain disruptions and subsequent price increases were combined with international conflicts and a considerable number of democratic elections,” says Chris Wilson, an investment counsellor with RBC Wealth Management in the British Isles.
Wherever investors turn, the effects of geopolitics and inflation, coupled with policy responses, seem to be unavoidable – and volatility is very much part of investing. Wilson says, “Volatility is something that comes up in a lot of conversations with clients. Among other factors, bond prices will be considering future interest rate changes, commodities will be reacting to the strength of the U.S. dollar or supply issues and equities will be adjusting with the underlying demand to create earnings and support valuations.”
For high-net-worth individuals with significant cash reserves, previous episodes of high inflation outpacing interest-rate rises ate away at purchasing power. But Wilson has also noticed a sense of poise among investors in recent years, which sets the current volatility apart from the frenzied tension of the 2008 global financial crisis. “Clients have certainly been calmer, in my experience,” he says. “Rather than frantic calls, clients are interested, they want to be educated and to know what we’re doing.” Indeed, a 2023 RBC Wealth Management survey of 600 UK-based high-net-worth individuals identified that 72 percent were in need of some form of guidance on how to manage their investments.
To understand bear markets is to recognise that financial markets aren’t linear; they move through peaks and valleys. Historically, they’ve been resilient, balancing downturns with growth over the long term.
An Investor Insights note from RBC Global Asset Management highlighted that between 2014 and 2019, we have experienced multiple days when the financial markets fell 10 percent or more – referred to as “drawdowns.” Even with more complex dips like the global financial crisis of 2008, when the drawdown hit nearly 45 percent at the worst of the crisis and recovery lasted several years, the return of investor confidence helped spark a decade-long period of growth.
Bear markets and recessions are part of a normal market cycle. According to data from Seeking Alpha , there have been 26 bear markets since 1928.1 On average, those bear markets have lasted 289 days – which, for a long-term investor, is a blip in their overall growth strategy.
In a lot of ways, downturns have a tendency to build the case for a long-term view, says Chris Matthews, managing director, RBC Wealth Management in the British Isles. Letting emotions drive you to take short-term gambles like pulling money out of the market during bear markets can be costly. “It’s that fight-or-flight … you’ve got-to-do-something feeling,” he says.
According to RBC Wealth Management research based on the S&P 500 Total Return Index, if you invested £10,000 in the S&P 500 from Nov. 2004 to Nov. 2024, and stayed invested, you’d be looking at a 10.52 percent annualised return.
Chart showing RBC Wealth Management research which indicates if you invested £10,000 in the S&P 500 from May 2002 to April 2022, and stayed invested, you’d be looking at a 9.1 percent annualised return.
“If you were out of the market on just the best 10 days, your annualised return would be 6.3 percent, and if you were out for the best 20 days, you’d have a 3.6 percent annualised return,” he says. “Generally, the biggest bounce days are right on the back of when the news is at its worst, when nobody is expecting it to get better … those are the days when you want to make sure you’re in the market.”
That being said, Matthews says “timing the market is the toughest thing to do” – especially when the market is impossible to predict. If you have lost your nerve or made a knee-jerk decision because you feel like you’re doing nothing, “you’re going to miss market rallies.” It’s better to focus on what you can control.
Moments of uncertainty create an opportunity to revisit your plan, says Wilson. “Check in on your broader financial position and make sure you’re on the right track, accepting that there’ll be a lot of volatility along the way, and this is one of those lower moments.”
He says part of the wealth planning discovery process is asking clients questions to really understand their risk appetites – for example, how would they react if markets were down 15 percent, 35 percent or 50 percent? And what proportion of their wealth would be impacted? “It’s goals-based investing with a purpose,” he says. “And in that process, it’s discovering not just your ability to take risk, but your willingness to maximise the return for that level of risk.”
Matthews agrees. “These times aren’t comfortable, but what they really do is shine a light on whether or not you’re in the right strategy,” he says. “If the markets are down 20 percent and that’s a big surprise that causes you high levels of anxiety, what that shows is you may not have been in the right strategy for your risk profile to start with.”
He says the next step would be to bring those feelings to your investment manager to revise your approach, find strategic opportunities and rebalance your asset allocation.
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Fundamentally, whether it’s a drawdown or a momentary spike, investors who have managed to hold their position and take a long-term view have been rewarded with growth. Since 2010, there have been four growth scares – where the economy narrowly dodges a recession.2 Once the market hit bottom, the S&P 500 rallied by an average of almost 30 percent 12 months later.
Matthews is quick to acknowledge that understanding market context comes easier to clients who have seen their wealth go through these cycles. But he also points out for the next generation of high-net-worth investors who have entered the market during a period of growth, the latest downturn is obviously unnerving. “They’ve only seen things go up and up,” he says. “Going through things like Covid-19 shows you the world can change really quickly.”
Regardless of what is driving the negative sentiments and bear market – whether that’s geopolitics, inflation or a public health crisis – Matthews says his approach remains the same: “We deal with data and we think in line with the client’s priorities and long-term objectives.”
1. As of May 2022.
2. As of Nov. 2024.
Please note: The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute investment, tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.
This article was updated in Jan. 2025.
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