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Bear Market Investing

Published on 11/07/2022

If you’d invested in the S&P 500 in September 2007 your portfolio would have been down 42% by the end of 2008. Feels like today, right? If you’re not sure what to do now that your investments have plummeted, how’s this for a persuasive argument for long-term investing? If you held those S&P 500 investments until now, your portfolio would be up 139%.

It can feel scary in these bear market conditions, so here’s some context and some thoughts on bear market investing. A bear market occurs when prices in the market fall by 20% or more. When bears attack they swipe their paws down.

What happened in 2008?

Today’s bear market has differences from that of the 2008 crash. Firstly, the ‘08 crash was brought on by easy credit and a huge amount of borrowing. At the time, mortgages were given to those who had no real way of paying them back, and so when house prices peaked, people started defaulting on those loans. These defaults led to a rapid decrease in mortgage-backed securities, which is a type of investment that pools individual mortgages together.

Banks who’d invested a lot of money into these mortgage-backed securities went headlong into a liquidity crisis - they didn’t have enough cash on hand - and just like that, our financial system was brought to its knees.

Since then, regulators have brought in new rules to strengthen financial systems, ensuring that we will likely never suffer a similar crash. And we’ve also been riding the wave of a bull market (a market in which prices are rising or are expected to rise, taken from the fact that when bulls attack they swipe their horns up) with near-zero interest rates and low inflation.

What’s happening now?

So why are we seeing such a change in fortunes? Well, it’s down to what we’ve all been talking about incessantly since early 2020: Covid-19 plus the war in Ukraine. These two life-altering events have led to high inflation rates.

The decade-long low inflation rates (aka a Goldilocks economy) helped propel mainly high-growth and tech stock prices into the stratosphere - and as quickly as they rise, they fall. It’s reminiscent (but in no way identical) of the early 2000s dot-com bubble where there was an excess of money thrown at tech start-ups with little revenue or profits.

Inflation now: the real talk

But let’s break down the conditions: firstly the pandemic. With workforces disrupted we saw a disruption to the production of goods and delivery of services, meaning there were simply fewer goods to go around (add panic buying into the mix here). This led to supply chain issues; Brexit was the cherry on the cake. Fewer goods equals rising prices.

People moved out of cities, renovated and even built their own homes. They quit their jobs in droves, and those that stayed saw their skills in demand and their salaries improve. They also realised that their home was a great place to be, meaning that when the world did open up again, they were hesitant to leave and spend their cash at the pub, or by travelling (we feel you).

When war broke out in Ukraine, we saw further challenges to supply chains, with commodities like oil and agricultural products, like wheat, being trapped within its borders or even restricted, pushing prices through the roof. On top of this, we’ve had further months-long lockdowns in China straining supply chains further still.

So, should I panic?

But what can be said about investing in a bear market? If you’re in it for the long-term making changes now could be worse than doing nothing at all. As we said at the top of this article if you’d invested in the S&P 500 in 2007, in 2008 you’d have been down a mind-boggling 42%. But, sticking with it, for the long-term, 14 years later and you’d be up 139%.

Bear markets don’t usually last long, they are part of health market cycles, and are excellent buying opportunities. If you feel comfortable with what you’re invested in (which you should be, otherwise… why?), and you’re in it for the long haul, don’t panic, and if it helps, turn those notifications off!

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