The question isn’t if another bear market is coming. It’s when. That can sound a little scary when you put it like that. But it’s not meant to instill fear. It’s meant to set proper expectations.
If you think that stocks will continue to just go up, a bear market can cause you to panic, sell when prices have already fallen, and miss the subsequent recovery. But if you know that 20% to 30% corrections happen from time to time, you’re much more likely to behave rationally when they do. That mentality can help improve your portfolio’s long-term returns.
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Warren Buffett viewed pullbacks as opportunities. He often uses them as chances to pick up shares of quality businesses at discount prices. The deeper the bear market, the better the opportunity, as long as the business is still in good shape.
In his 2009 letter to Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) shareholders, Buffett dropped another of his signature investing quotes. This one would be particularly insightful for how investors should handle bear markets: “Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.”
Bear markets are more frequent than you think
Over the past 150 years, a bear market, defined as a decline of at least 20%, has happened roughly once every six years. The median decline is 33%. The last one occurred in 2022, when the S&P 500 (SNPINDEX: ^GSPC) fell by around 25%.
To put that into some perspective, the typical long-term investor should expect to experience roughly half a dozen bear markets throughout their lifetime. Of course, they won’t happen on a schedule. The bear markets between the dot-com tech bubble and the 2008 financial crisis occurred roughly six years apart. However, the next one after that didn’t occur until the COVID-19 pandemic, about 12 years later. The 2022 bear market happened just two years after that.
Investors should always be prepared for bear markets. The volatility and drawdowns are simply the price of admission for investing in stocks and trying to maximize your long-term returns.
Investors should take advantage of lower prices, not run away
Buffett feels you should view buying stocks like you would view buying clothes or food. In those instances, you’d be more inclined to buy knowing that these things are on sale. People should feel the same way when it comes to buying stocks.
