By Wei Hu, VP Financial Research, Financial Engines and
Bill Tracy, Portfolio Manager, Financial Engines

We’ve been getting a lot of questions about the market volatility associated with COVID-19. Here are answers to five of the most common bear market questions clients are asking.

Q: What is a “bear market?”

A: A bear market is a period where stocks (often represented by the S&P 500 Index, a collection of large U.S. companies) fall 20% or more from their most recent peak. Going back to the mid-1950s, a bear market in U.S. stocks has occurred about every five to five-and-a-half years.

Q: How long can I expect it to last?

A: When it comes to the time required for the market to get back to its pre-bear market peak, the range is quite wide, and the characteristics of each bear market environment don’t tell us much about how long it will take. On average, it took the S&P 500 Index 773 calendar days to move back to break even following past bear markets. But that’s on average. In one instance, the snap back happened in just 83 days. For one bear market in the 1970s, it was a 2,114-day journey. Investors often need patience to ride out a bear market.

Source: Bloomberg, S&P Dow Jones Indices, Edelman Financial Engines.


Q: Is a big market drop a fantastic buying opportunity for stocks?

A: Not necessarily. If you look at the 5-year returns of the S&P 500 after it bottomed out in each of the bear markets, there’s no relationship between the size of the drop and future returns. Investing in stocks should be a long-term, forward-looking decision, not based on what has happened in the past. Also keep in mind that no one knows until afterwards when the bottom of the market was reached.

Note: 5-year return calculated beginning the month after the market bottom.
Source: Bloomberg, S&P Dow Jones Indices, Edelman Financial Engines.


Q: What should I do during a bear market?

A: History shows us that we can’t predict when the market will bottom out. And we can’t predict how long the recovery will take. Instead, focus on what you can control. Continue contributing to your retirement accounts, particularly if you are getting a company match.

Also, stay invested in a diversified portfolio that supports your overall retirement goals. If you’re young or mid-career, what happens today will likely have a minor impact on your long-term retirement success.

Q: What if I’m planning to retire soon?

A: The data show that market downturns can last for more than a couple of years. But it’s important to understand that some exposure to stocks is still a good idea as you head into retirement. You want your assets and income to keep growing to help offset any effects inflation may have on your purchasing power. Even if you are hoping to retire within a year, your retirement income may need to last 30 years or longer. So you should maintain a long-term outlook when making investing decisions.

Another action that can affect your retirement income is deciding when to start taking Social Security benefits. If you take Social Security early, your lifetime monthly benefit will be lower than it would be if you waited until your full retirement age to claim your benefits. Your benefits will go up about 8% a year for each year you delay beyond your full retirement age, until age 70. Deciding when to take benefits can get complicated for married couples. Use our free Social Security optimization tool to see if you can boost your overall retirement income.

An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
Investing strategies, such as asset allocation, diversification, or rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.

©2020 Edelman Financial Engines, LLC. Financial Engines® is a registered trademark of Edelman Financial Engines, LLC. All advisory services provided by Financial Engines Advisors L.L.C., a federally registered investment advisor. Results are not guaranteed. See for patent information.

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