Is It Really Safe to Invest in the S&P 500 in a Bear Market? | The Motley Fool (2024)

FAQs

Is It Really Safe to Invest in the S&P 500 in a Bear Market? | The Motley Fool? ›

Is it safe to invest in the S&P 500? The answer is a resounding "yes." It's safe for long-term investors to invest in the S&P 500, even in a bear market.

Whether you're nervous about market volatility or simply want an investment you can count on to keep your money safe, an S&P 500 ETF or index fund is a fantastic choice.

The most common place to set aside funds from that sell-off is a cash or money market account. A cash account, most commonly in the form of a bank or credit union savings account, is not tied to the stock market and presents little risk to investors.

Bonds also are an attractive investment during shaky periods in the stock market because their prices often move in the opposite direction of stock prices. Bonds are an essential component of any portfolio, but adding additional high-quality, short-term bonds to your portfolio may help ease the pain of a bear market.

Market trends suggest that the S&P 500 will perform well in 2023, and Tesla and Meta Platforms could rise with it. The S&P 500 index is the most widely followed benchmark on Wall Street.

After ending the year down nearly 20%, the S&P 500 index is in the green for 2023. And the Nasdaq Composite — which plunged 33% in 2022 — is up more than 4.5% this year. So when will stocks fully recover from the bear market? Many experts appear optimistic it will happen in 2023.

The average forecast expects the S&P 500 to end 2023 at 4,009, according to Bloomberg, the most bearish outlook since 1999. But the predictions range from a low of 3,400 to as high as 4,500, representing “the widest dispersion since 2009,” Ms. Shalett pointed out. “There's always uncertainty in forecasts.

Investing during a bear market isn't always easy but can be a smart move. The stock market isn't as dangerous as it may seem, and by choosing the right stocks and holding those investments for the long term, you can keep your money as safe as possible.

If you're retired, don't take withdrawals from your stock funds in a bear market unless you have no other choice. You won't have income to cover your losses. And if your stock fund is down 15 percent and you withdraw 4 percent, your account will be down 19 percent. Withdrawals in a bear market just make things worse.

While there is no one-size-fits-all number when it comes to how much cash investors should hold, financial advisors typically recommend having enough money to cover three to six months of expenses readily available.

How long does a bear market usually last? ›

The average length of a bear market is 292 days, or about 9.7 months. That's significantly shorter than the average length of a bull market, which is 992 days or 2.7 years. Every 3.5 years: That's the long-term average frequency between bear markets.

Invest in Dividend-Paying Stocks

Dividend-paying stocks are an easy way to make money in a bear market. They pay a steady income, regardless of whether the market is going up or down. So while the stock may not increase in value, investors can still rely on the dividend payments.

Is Now a Good Time to Buy the S&P 500? We do not think now is a good time to invest heavily in the S&P 500 if you have a short- to medium-term horizon. We underweight equities in our broader Asset Allocation framework because inflation is still high, and the Fed continues to hike interest rates in response.

The S&P 500 trading at 17-18 times earnings by late 2023 — about 5.5% higher from today's level — seems quite realistic.

NYU business professor Aswath Damodaran has done the math. According to his math, since 1949 S&P 500 investments have doubled ten times, or an average of about seven years each time. In some cases, like 1952 to 1955 or 1995 to 1998, the value of the investment doubled in only three years.

The 2007-2008 Financial Crisis and Great Recession.

The index acts as a benchmark of the performance of the U.S. stock market overall, dating back to the 1920s. The index has returned a historic annualized average return of around 11.88% since its 1957 inception through the end of 2021.

A year of losses for the S&P 500

The S&P 500 lost 19.4% over the past 12 months, notching its worst year since 2008.

“The S&P 500 has never bottomed before the start of a recession, but it's not clear yet whether the US economy will actually fall into a downturn,” said Ed Clissold, chief US strategist at Ned Davis Research, whose firm forecasts a 75% chance that the US will slump into an economic slowdown in the first half of 2023.

What is the forecast for the S&P 500 in 2023? ›

The S&P 500 was expected to end 2023 at 4,200 points, which would amount to a 9.4% increase for the calendar year, according to the median forecast of 42 strategists polled by Reuters. This forecast target is unchanged from a November 2022 poll.

Historically, then, it's actually harder to lose money with the S&P 500 if you're a long-term investor. Even if there's more volatility on the horizon or we face a recession, as long as you hold your investments for at least a decade or two, it's extremely unlikely you'll lose money.

That's where rebalancing comes in. It's important to take time and realign your investments with your original plan, whether you still have decades to invest or are nearing retirement. It's particularly important in Bear markets and the prospect of a recession looming.

It's not always easy to retire during a bear market, but it is possible. If your finances are in good shape, market volatility doesn't have to hold you back from retiring. But if your savings are falling short, waiting a year or two could help you head into retirement more prepared.

The average 70-year-old would most likely benefit from investing in Treasury securities, dividend-paying stocks, and annuities. All of these options offer relatively low risk.

Common mistakes to avoid when retiring into a bear market include taking on too much risk with investments, failing to diversify portfolios, making poor financial decisions due to emotions, not having an adequate emergency fund, and not taking advantage of tax-deferred retirement accounts.

Older investors with high account balances run higher bear market risks than younger workers with lower savings. Diversifying into less risky stocks can minimize bear-market losses and offers long-term benefits. Going into cash during a bear market is likely to depress returns following the recovery for many investors.

The fifty percent principle predicts that when a stock or other security undergoes a price correction, the price will lose between 50% and 67% of its recent price gains before rebounding.

If a bear does drop by more than 2% per month, there's often a market counter-rally that can provide better opportunities for investors to sell.

For security purposes, this money should be kept in a bolted down safe with any other valuables in the home, McCarty said. “Make sure the safe is fire and waterproof to avoid any damage. Make sure you deposit and replace the money on occasion so that the bills don't get too old.”

Is the S&P 500 overvalued? ›

But importantly, the S&P 500 is overvalued, trading at 17.9 times 2023 earnings estimates, an insanely high valuation for S&P 500 that is expected to show no growth in 2023 versus 2022.

Defensive stock sectors including consumer staples, utilities, and health care tend to outperform during bear markets. Government bonds offer important diversification benefits and the potential of strong returns in a recession.

Buffett employs a selective contrarian investment strategy. Using his investment criteria to identify and select good companies, he can make large investments (millions of shares) when the market and the share price are depressed and when other investors may be selling.

Buying during a market crash can be scary because investors don't want to see their investments continue to fall and turn red just after buying them. But for Buffett, he sees that as an opportunity to buy more of a stock, rather than worry and sell it off in a panic.

In June 2022, the S&P 500 entered a bear market for the first time since March 2020.

Bear markets are largely pessimistic ones, so profits can be realised from short-selling and selling investments early in the bear market. They can also come from buying at the bottom of a bear market or a buy and hold strategy, where traders and investors simply wait out the bear market and ride the price rally up.

Where do millionaires keep their money? High-net-worth individuals put money into different classifications of financial and real assets, including stocks, mutual funds, retirement accounts and real estate. There were 24.5 million millionaires in the U.S. in 2022. And only 21% of them inherited money.

Another key strategy for surviving bear markets is to invest for the long term. Smart investors understand that the stock market is cyclical and that bear markets are a natural part of the cycle. Therefore, they focus on the long-term outlook for their investments rather than short-term fluctuations in stock prices.

And yet, for the S&P 500, there's one month that has repeatedly had a strong performance — April. Since 1928, the S&P 500 has had an average monthly gain of 1.4% for April, according to an analysis by Yardeni Research.

What is the forecast for S&P 500 stock? ›

The S&P 500 price targets range from 3,675 to 4,500. This implies returns of between -4.6% and +16.8% from the Dec 16, 2022 close of 3,852.

Stock prices tend to fall in the middle of the month. So a trader might benefit from timing stock buys near a month's midpoint—the 10th to the 15th, for example. The best day to sell stocks would probably be within the five days around the turn of the month.

After ending the year down nearly 20%, the S&P 500 index is in the green for 2023. And the Nasdaq Composite — which plunged 33% in 2022 — is up more than 4.5% this year. So when will stocks fully recover from the bear market? Many experts appear optimistic it will happen in 2023.

S&P 500 12 Month Total Return is at -7.73%, compared to -7.69% last month and 15.65% last year. This is lower than the long term average of 8.36%.

By mid-2024, it is predicted to rise to 22,500, surpassing the previous record closing high of 22,087.22 achieved in March, but falling short of the prediction of 23,000 made in November.

5% or greater pullbacks occur about every 7 months. 10% or greater pullbacks occur about every 2 years.

In the rule of 70, the “70” represents the dividend or the divisible number in the formula. Divide your growth rate by 70 to determine the amount of time it will take for your investment to double. For example, if your mutual fund has a three percent growth rate, divide 70 by three.

Short of a recession — a very real possibility — consensus estimates are for about 5% earnings growth (opens in new tab) for S&P 500 companies in 2023. That's certainly less than what it was in years past, but still respectable.

Fund description

The Invesco S&P 500® Downside Hedged ETF (Fund) is an actively managed exchange-traded fund (ETF) that seeks to achieve positive total returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns.

What is S&P 500 average return? ›

Basic Info. S&P 500 1 Year Return is at -9.29%, compared to -9.23% last month and 14.03% last year. This is lower than the long term average of 6.33%. The S&P 500 1 Year Return is the investment return received for a 1 year period, excluding dividends, when holding the S&P 500 index.

The S&P 500 was expected to end 2023 at 4,200 points, which would amount to a 9.4% increase for the calendar year, according to the median forecast of 42 strategists polled by Reuters. This forecast target is unchanged from a November 2022 poll.

Basic Info. S&P 500 5 Year Return is at 55.60%, compared to 46.29% last month and 91.75% last year. This is higher than the long term average of 44.28%. The S&P 500 5 Year Return is the investment return received for a 5 year period, excluding dividends, when holding the S&P 500 index.

Investing in the S&P 500

You can't directly invest in the index itself, but you can buy individual stocks of S&P 500 companies, or buy an S&P 500 index fund or ETF. The latter is ideal for beginner investors since they provide broad market exposure and diversification at a low cost.

Market risk

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

Some things to consider when thinking about how the S&P 500's price will move include factors such as company earnings per share, revenue, major news involving the companies listed on the exchange, economic data, major political events, and interest rates.

In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500 (^GSPC -0.21%), then you would be sitting on a cool $1.2 million today. That equates to a total return of 120,936%.

The average stock market return is 10%. However, not every period in the market is average and not every investor's portfolio is average. What this means is that investors are wise to assume returns lower than 10%, such as 7-8%, when forecasting the long-term performance of a portfolio of stocks.

March 24, 2000: The S&P 500 index reaches an all-time intraday high of 1,552.87 during the dot-com bubble.

What stock will grow the most in 2023? ›