Why Bear Markets Can Help You Create Life-Changing Wealth

Bear markets are periods of time when the stock market is down 20% or more from its all-time high. The Nasdaq Composite was briefly in a bear market earlier this year, while the S&P 500 entered a correction, which is a reduction of 10% or more from the maximum. But the Nasdaq Composite and the S&P 500 were in a bear market in the spring of 2020, the fall of 2018, and of course during the 2008 financial crisis.

Bear markets can be stressful and stressful. But over time, there is a very good chance that you could benefit from a bear market. This is why.

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What does a bear market really mean?

Bear markets simply mean that stock values ​​are plummeting, so they really only hurt people with substantial assets. It’s a simple concept, so simple, in fact, that we often forget that bear markets impact wealthy people far more than middle class or young investors. The statistic that may really surprise you is that the richest 10% of Americans own, wait for it, 89% of the US stock market.

The American middle class has most of their net worth in their homes. And if a middle-class family isn’t planning on moving any time soon, it’s okay if property values ​​go down, especially after the rise in home prices we’ve seen in the last two years.

As a general generalization, a bear market will have a negative impact on retirees, net spenders and anyone in the asset distribution phase. However, a bear market could help first-time homebuyers, those looking to make big purchases (like a new car), anyone who is a net saver, and anyone in the asset-building phase of their life. .

But what about the real economy?

Of course, bear markets can also emerge in times of widespread economic hardship, such as rising unemployment. But according to the March 2022 Bureau of Labor Statistics report, the US unemployment rate is currently 3.6%, which is tied with 2019 for the lowest level since 1969.

What’s more, American workers in the bottom 30% of earners have seen their real wages rise, while those in the top 70% have seen nominal wage increases but negative changes in real wages due to inflation.

With incomes rising and unemployment near record lows, it looks like the lower and middle classes stand to benefit the most from a bear market.

Nerves of steel

It’s no secret that bear markets have historically been some of the best times to buy assets. The dotcom bubble in the early 2000s wiped trillions of dollars of stock value from the market. Those who could buy and hold shares like Amazon (AMZN -4.55%), Microsofteither Google after the crash would be some of the best returns in the history of the stock market. The same goes for the financial crisis of 2008.

Everyone knows in hindsight that stocks like Amazon were big buys. But what you may not know is that in November 2001, Amazon stock was, at its worst, 93% below its all-time high.

AMZN Chart

AMZN data by YCharts

Imagine a stock in your portfolio that is down 93% and then becomes one of the most valuable companies in the world 20 years later. It’s a level of volatility that most investors simply can’t handle. And that’s why buying and holding stocks for the long term is an incredible strategy, but also one of the most difficult to execute.

benefit years

The old saying is that no one has extra dry powder to buy during a bear market. And in the short term, that’s generally true. But instead of looking at who was lucky enough to have extra money to buy big stocks during the absolute low of a bear market, it’s more useful to ask who was able to buy stocks for the next five or 10 years after a bear market.

If we remember the financial crisis of 2008, for example, the biggest beneficiaries were people without much savings who had not yet reached their highest earning years. Even better positioned were those without houses or mortgages who could benefit from the collapse in house prices. This cohort would be anyone who is between the ages of 40 and 55 today. In 2008, there were young adults in their 30s and 30s. And for the next 13 years, they experienced one of the biggest bull markets in history.

Now you may be thinking that the age group of adults who have not yet reached their prime earning years, which is 45 to 54 years old, is a small number and not representative of the US population. It may surprise you to know that 109.8 million Americans are between the ages of 20 and 44, which is exactly one-third of the total population. But that’s a misleading statistic, because it takes children into account. Of Americans age 20 and older, 44.2% are between the ages of 20 and 44, which is surprising considering the Baby Boomer generation is above that age group.

However, many Americans over the age of 44 do not own homes or have significant investments in the stock market. All of this is to say that, based on the data, most Americans are likely to benefit from a stock market sell-off.

Stay cautiously optimistic

Navigating a bear market is possibly one of the hardest things to do as an investor. But it is also one of the most rewarding. The problem is that you have to invest in quality companies with solid fundamentals. All success stories have an element of luck. For every Amazon, Microsoft or Google, there are hundreds of failed companies.

One of the easiest ways to survive a bear market is to stick with industry-leading companies that have been through one, two, or even multiple bear markets in the past. There are several companies right now that are down 30% or more from their highs that have done exactly that and might be worth a look.

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