Investor Attitudes: Are You Ready for A Bear Market?

A new MoneyRates survey explores what investors know about stock market cycles and how it informs their decisions. Many could unknowingly be adding risk to their portfolios as a result.
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Most investors responded that a bear market would affect their lifestyles in 2021.

How is the stock market doing today?

You can answer that in terms of how many points the market is up or down. But to really know where your investments stand, you have to put current stock market trends in the context of stock market cycles.

The stock market goes through cycles of bull markets and bear markets. Understanding stock market history can give you a better sense of what to expect from the stock market and help you prepare and respond appropriately as market conditions change.

How well prepared are today’s investors for the reality of a bear market? To find out, designed a survey of 251 people with at least $25,000 in stock investments. Here’s what the results show:

  • Nearly 44% believe a bear market occurred early in 2020
  • Most investors believe a bear market would affect their lifestyle in 2021
  • A significant number of investors may have increased their exposure to an increasingly risky market

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MoneyRates Investor Attitude Survey: Bear Markets

The new survey, administered by Op4G, found differing opinions from investors about today’s market and the risk of a bear market in the near future.

1. What is a bear market?

Most respondents (33.07%) said they believe a bear market is “A loss of 10% or more that took at least a year to recover from.”

The next-most-popular opinion (27.49%) was that a bear market was a loss of 20% or more, even if the market quickly bounced back.

These strikingly different concepts suggest that people aren’t sure what to expect from a bear market, including how much they stand to lose from one and how long it could last.

Notably, investors with at least ten years of experience were more likely than less-experienced investors to define a bear market as a loss of at least 20% rather than 10%. This suggests that more experienced investors have a stronger sense of the damage a bear market can do.

What would you consider to be a bear market for stocks? Total (%)
A loss of 10% or more that took at least a year to recover from 33.07%
A loss of 20% or more that took at least a year to recover from 19.12%
Any loss of 10% or more, even if the market quickly bounced back 17.93%
Any loss of 20% or more, even if the market quickly bounced back 27.49%
Other 2.39%

2. Was the pandemic the start of a bear market?

While there were differing opinions on how a bear market is defined, most respondents (43.82%) indicated the last bear market occurred earlier this year.

The next largest group of investors (39.04%) recalled that the 2008 financial crisis was the last bear market.

The market’s decline of about 30% from mid-February to mid-March would certainly seem severe enough to count as a bear market, though the fact that it took less than six months for the market to fully recover its losses may explain why some investors don’t remember it that way.

What investors should recognize is that, at their worst, bear markets have been so severe that stocks have lost about half their value. These losses can be made more devastating by the fact that sometimes it has taken years for the market to fully recover.

When do you recall the last bear market being? Total (%)
Back in the 2008 financial crisis 39.04%
Earlier this year 43.82%
I don’t recall 13.15%
When the dot-com bubble burst around the year 2000 3.98%

MoneyRates Investor Attitude Survey: Assessing Market Risk

Today’s investors recognize the possibility of stock market declines, though to different degrees. They also seem to have differing opinions on how likely a bear market is to occur soon.

But investors should take note of another development: The year 2020 has seen rising stock prices and falling company earnings – a dangerous combination. This has pushed the price-to-earnings ratio of the S&P 500 well over 30. Its average over the prior 30 years had been 24.53.

This means stocks are unusually expensive at a time when there are several risks facing them. It’s like being up on a very high ladder in a strong wind.

3. Did you change your stock allocation in response to the pandemic?

While roughly half of all respondents (50.20%) said they had held their stock allocations steady over that time, a significant number of investors appear to have increased their exposure to an increasingly risky market.

In the face of steadily rising prices in recent months, 40.64% of survey respondents reported that they had increased their stock holdings over that time. This contrasts with just 6.77% who reported decreasing their stock holdings as prices rose.

Have you since re-adjusted your stock allocation? Total (%)
No, I haven’t changed it much since the end of March 50.20%
Yes, I’ve increased my stock holdings since then 40.64%
Yes, I’ve decreased my stock holdings since then 6.77%
I don’t know 2.39%

4. How would you describe the current risk of a bear market?

This behavior is especially odd considering that two-thirds of respondents (66.94%) consider the current risk of the market to be unusually high. This includes 48.61% who see today’s market as a little riskier than usual and 18.33% who consider the risk of a bear market to be very high.

How would you describe the current risk of a bear market? Total (%)
A little higher than usual 48.61%
A little lower than usual 5.98%
About normal 26.69%
Much lower than usual 0.40%
Very high 18.33%

5. How did stock market fluctuations affect investors’ sleep habits?

Though people see today’s market as risky, not too many have been losing sleep over it. Most respondents (62.95%) reported that they have lost sleep worrying about the stock market at some time in the past, but just 25.10% said they had done so over the past three months.

Have you ever lost sleep worrying about the stock market? Total (%)
Rarely 48.61%
Often 14.34%
Never 37.05%
Have you lost sleep worrying about the stock market in the past three months? Total (%)
No 37.85%
Yes 25.10%
Total 62.95%

Unfortunately, this represents classic investor behavior. People tend to worry about stocks only when their prices have already dropped. It would be more productive to become concerned about stocks while prices were still rising, when there is still time to do something about it.

MoneyRates Investor Attitude Survey: Lifestyle Impact

The stakes are high because most investors surveyed responded that a bear market would affect their lifestyles next year.

6. How would a bear market affect your spending in 2021?

A majority (56.58%) say they would spend less in 2021 if there were a bear market between now and then, including 41.04% who expect they would spend a little less and 15.54% who say they’d spend a lot less.

How would a bear market affect your spending in 2021? Total (%)
I doubt it would affect my spending one way or the other 39.44%
I’d be likely to spend more if there was a bear market between now and then 3.98%
I’d probably spend a little less if there was a bear market between now and then 41.04%
I’d probably spend a lot less if there was a bear market between now and then 15.54%

MoneyRates Investor Attitude Survey: Impact Amid Various Risks

Interestingly, while most survey respondents said the risk of the current market was higher than usual, this wasn’t reflected in their expectations for the market’s return next year.

7. What do you expect the U.S. stock market to do in 2021?

The survey found that only 9.56% said they expect a decline of 10% or more.

The most common expectation was for a modest increase of between 3% and 10%, which was the prediction of 33.07% of respondents.

Another 28.69% expect the market to be roughly even (between -3% and +3%) while 23.11% expect a moderate decline of 3% to 10%.

Just 5.58% expect a significant increase of 10% or more.

What do you expect the U.S. stock market to do in 2021? Total (%)
Decline by 10% or more 9.56%
Decline by between 3% to 10% 23.11%
Increase by 10% or more 5.58%
Increase by between 3% and 10% 33.07%
Stay roughly flat, between -3% and 3% 28.69%

These responses suggest that few investors expect very serious investment consequences despite a variety of different events that could threaten the market.

8. What is the biggest current threat to the stock market?

The election was an especially big concern for survey respondents, with a total of 41.43% citing it as the source of the biggest threat to the stock market. This included both those who said the biggest threat to the stock market would be the wrong candidate winning the election (25.10%) and those who feared the potential for disputed election results (16.33%).

The coronavirus was chosen by 35.86% of survey respondents as the biggest threat to the stock market. Other factors identified as the biggest threat included excessive stock valuations (14.34%), trade wars (5.18%) and social unrest (2.39%).

What is the biggest current threat to the stock market? Total (%)
The coronavirus pandemic 35.86%
The wrong candidate winning the election 25.10%
Potential for disputed election results 16.33%
Excessive stock valuations 14.34%
Trade wars 5.18%
Social unrest 2.39%
Other 0.80%

9. What do you consider to be the safest alternative to stocks in a bear market?

Finally, survey respondents had their differences about the best way to shelter investments from a bear market.

Cash equivalents, such as savings accounts, were the most popular choice, with 37.45% of respondents citing them as the safest alternative to the stock market. Government bonds were the next most popular choice (19.12%), followed by corporate bonds (14.34%), gold (12.35%), real estate (11.16%), and Bitcoin or other cryptocurrencies (1.59%).

Corporate bonds may be an especially misguided choice, though. A setback to corporate earnings that affects stocks may also put corporate bonds in peril.

What do you consider to be the safest alternative to stocks in a bear market? Total (%)
Cash equivalents – savings accounts, money markets, etc. 37.45%
Government bonds 19.12%
Corporate bonds 14.34%
Gold 12.35%
Real estate 11.16%
Other 3.98%
Bitcoin or other crypto currency 1.59%

How to Survive a Bear Market

Unless you are a financial professional, chances are you don’t have the time and resources to follow all the conditions that cause stocks to go through cycles of bull and bear markets. Fortunately, there are a number of ways you can get help with steering your investments through those cycles:

  • Asset allocation funds

    These mutual funds manage how much you have in stocks and how much is invested in less risky asset classes. Depending on the specific fund, this may be done based on market conditions, your age or a permanent allocation regardless of conditions. Allocation funds are popular on 401(k) menus and are also available through online brokers or directly from many mutual fund companies.

  • Robo advisors

    These are automated programs that adjust your investments according to your needs and preferences.

  • Professional financial advisors

    There are a variety of financial advisors that provide a range of different services. Some focus solely on managing your investments while others put those investments in the context of long-term planning. A key thing to find out about any financial advisor is whether they are acting as a fiduciary. This means they have a legal responsibility to make decisions in your best interest.

Besides expertise, a benefit that good financial professionals bring to the table is keeping you on track through the wildest parts of the market cycle. Inexperienced investors tend to give in to fear and greed at the wrong times. A good financial professional should help you see where your decisions fit into the market cycle.

Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).