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What You Need to Know About Bear Markets

After the record-long bull market ended in March 2020, many of us needed a refresher course on bear markets.

Markets become bears when their price falls 20% or more off the most recent high. U.S. stocks hit a record high on Feb. 19, 2020, when the S&P 500 index closed at 3,386. But just days after the bull market celebrated its 11th birthday, U.S. stocks fell sharply when triggered largely by the COVID-19 pandemic and an oil price collapse.

It was the fastest plunge into bear territory ever. But the recovery was also quick. A bear market ends when prices increases by 20% or more from its low. U.S. stocks reached a low point on March 23, 2020, when the S&P 500 index was down 34% from its high. But a little over two weeks later, the S&P 500 index was, by definition, back in bull market territory with gains of at least 20% from its low. However, some market watchers aren't ready to declare the bear gone until the market surpasses its old high.

The good news? As painful as bear markets can be, they are typically much shorter than bull markets. And bear losses are typically far less than bull gains. For instance, and according to J.P. Morgan Asset Management, since 1946, bear markets on average lasted 14 months and lost 35% while bull markets on average lasted 75 months and gained 198%.

Why you should revisit your asset mix now

The stock market is likely to be volatile for some time and always has the risk of volatility. That's why investors should take this opportunity to reassess their asset allocation — mix of stocks, bonds, and cash — to make sure it still matches their risk tolerance and time horizon. It's easy to overestimate your ability to handle volatility or risk when stocks are going up.

Early career investors who plan to retire decades away can generally invest more heavily in stocks, which tend to be more volatile but also tend to outperform other asset classes, such as bonds and cash, over time. For example, the Vantagepoint Milestone 2055 Fund1 (if available in your plan) designed for investors who won't need that money for 35 years, is currently made up of about 94% stocks and 6% bonds. And bear markets favor investors with longer time horizons. When stock prices fall — or go on sale — investors with longer time horizons can buy more shares and have the time to wait for them to recover.

Investors near or in retirement also need stocks to keep up with inflation in the decades ahead,  but they also need bonds and cash-like investments to provide some stability. For example, the Vantagepoint Milestone 2020 Fund1  (if available in your plan), geared for those expecting to start withdrawals this year, is currently made up of about 44% stocks and 56% bonds.

And no matter what stage of life you are in, your portfolio should be diversified2 — even within different asset classes. For instance, your stock portfolio should contain shares of large, mid and small company stocks including stocks focused on the U.S. and overseas because you can't predict which segment will perform the best at any given time. Check out this Market Unpredictability chart to see the top-performing indexes in the past decade.

1 The Fund is not a complete solution for all of your retirement savings needs. An investment in the Fund includes the risk of loss, including near, at, or after the target date of the Fund. There also is no guarantee that the Fund will provide adequate income at and through an investor's retirement.

2 Diversification does not protect an investor from market risks and does not assure a profit.

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