Bull markets are like big, noisy, rollicking parties: They’re a fun time, but the fun can’t go on forever. Eventually, the party must end. The music stops, the lights turn on, and people have to get back to reality and go back to work.
Here’s a bold prediction: Sometime in the future, the stock market will enter a bear market — defined as a 20% or more decline in the share prices of a major stock market index like the S&P 500 (SNPINDEX: ^GSPC).
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How do I know there will be a bear market? Because there always is. Markets don’t keep going up forever. It’s like a law of nature.
During my years as an investor and working adult, I’ve lived through several major stock market crashes and bear markets. These events are not fun to witness while they’re happening. But if you’re worried about a future S&P 500 bear market, here are a few moves you can make right now to protect your money and peace of mind.
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1. Remember: The S&P 500 has delivered 9.98% annualized returns for almost 100 years
The first thing to do before a big bear market is to keep calm and maintain a long-term perspective. Remember: For almost 100 years, since 1928, the S&P 500 has delivered average annual returns of 9.98%. At that rate of return, if you invested $1,000, your money would grow to $1,099.80 after one year. The next year, it would grow by another 9.98%, to $1,209.56. And so on with the power of compound interest.
This is an excellent rate of return, better than any savings account. But the stock market has no guarantees. You won’t automatically get exactly 9.98% every year. You have to hold on to your stock market investments and ride a few ups and downs to get there.
Yes, the stock market can make you rich, even if you only buy S&P 500 index funds like the Vanguard S&P 500 ETF (NYSEMKT: VOO) — which has delivered exceptionally strong annualized returns of about 15% during the past 16 years.
But you can’t get those strong long-term returns unless you’re willing to put up with some stress, volatility, and even the possibility of a crash along the way. There’s no reward without some financial risk.
2. Keep buying stocks with dollar-cost averaging
As an everyday person who’s investing in the stock market, you have a great gift: You don’t have to beat anyone with your investments. You’re not a professional money manager or someone running a hedge fund. You don’t have to outperform the market or impress anyone or pick stocks to keep your job. You’re not competing against anyone.
This should feel like a big relief. You don’t have to pick stocks. You don’t have to try to choose the best time to move money into certain industry sector exchange-traded funds (ETFs). If you’re investing for the long term, you can just keep buying a diversified portfolio of stocks every month, every payday, with the same amount of dollars invested each time.
This is called dollar-cost averaging. If you invest $100 per month into an S&P 500 ETF and share prices go down 10%, your $100 investment will buy an extra 10% of shares. You can automatically buy stocks on sale if you keep investing during a bear market.
3. Diversify your portfolio
If the thought of a bear market is making you lose sleep at night, now could be a good time to make some modest adjustments in your portfolio. For example, if you feel like you’re too highly concentrated in growth stocks or tech stocks, now could be a good time to look at dividend ETFs or bonds. If you worry that the S&P 500 is too top-heavy with artificial intelligence (AI) stocks, you could diversify into value stocks or international stocks.
There’s no guarantee that any stock or ETF will be the best choice for everyone and for every situation. The next bear market might not happen for several years. And high-flying tech stocks and large caps in the S&P 500 could continue to deliver strong returns.
But if your stomach gets queasy at the thought of a 20% decline in the value of your stock portfolio, you might want to make a few moves to diversify before that happens. The best time to avoid regrets in a bear market is while the previous bull market party is still going on.
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Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
