If a Bear Market Is Coming, History Has Good News for Investors

Bear markets, characterized by a 20% drop in stock prices, are an inevitable part of the economic cycle in the U.S. These market downturns occur approximately every three and a half years over the past 150 years. Although they can be unsettling, bear markets are not catastrophes but rather natural cooling periods for the economy.

With no reliable way to predict when the next one might hit, the smartest course of action is to remain invested rather than panic and sell off holdings. Experienced investors understand that buying during bear markets when others are selling can lead to purchasing assets at bargain prices. Dollar-cost averaging, which involves making regular contributions to investment accounts even during market downturns, further reduces the average cost per share and enhances potential gains when the market rebounds.

Bear markets typically last around nine and a half months on average, and while they are generally short-lived, they present an excellent opportunity to acquire high-quality investments at a low price. Historically, more than one-third of the S&P 500's best days have occurred in the first two months of a new bull market, even before it becomes apparent that a bull market has begun.

Investors who remained committed to their portfolios during the rough patches reaped significant rewards. For instance, had an investor purchased $5,000 worth of Nvidia stock in 2009 during a 20% pullback, that investment would now be worth $2,960,193. Recently, a similar "Total Conviction" signal is appearing for a different company in the $1.8 trillion space race, and with its stock now trading 20% below its recent highs, this may be an opportune moment to invest.

While past performance does not guarantee future results, analyzing historical trends can provide valuable insights into the optimal course of action during an impending bear market.