Historical data suggests investors should maintain long-term perspective during bear markets

Stock markets will eventually enter a bear market, defined as a decline of 20% or more in the share prices of a major index like the S&P 500. According to historical data spanning nearly 100 years, investors can protect their portfolios by maintaining a long-term perspective and utilizing dollar-cost averaging strategies.

The S&P 500 has delivered average annual returns of 9.98% since 1928. While this rate of return exceeds that of savings accounts, it is not guaranteed in any single year. Investors must hold onto their positions through periods of volatility to achieve these long-term averages. For example, a $1,000 investment at this rate would grow to $1,099.80 after one year, and to $1,209.56 the following year due to compound interest.

Vanguard S&P 500 ETF (VOO) has demonstrated the potential for strong performance, delivering annualized returns of approximately 15% over the past 16 years. However, achieving such returns requires tolerating financial risk, including the possibility of crashes. Individual investors do not need to outperform professional money managers or pick specific stocks to succeed. Instead, they can invest in a diversified portfolio consistently.

One effective strategy is dollar-cost averaging, which involves investing a fixed amount of money at regular intervals. If an investor puts $100 into an S&P 500 ETF each month and share prices drop by 10%, that same $100 buys an additional 10% of shares. This method allows investors to automatically purchase stocks at lower prices during market downturns.

Investors concerned about market volatility may consider adjusting their portfolio allocation before a decline occurs. Those heavily concentrated in growth or technology stocks might look toward dividend ETFs or bonds to reduce risk. Similarly, investors worried about the dominance of artificial intelligence stocks in the S&P 500 could diversify into value stocks or international markets.

There is no guarantee that any specific stock or ETF will be the best choice for every situation, and high-flying tech stocks may continue to deliver strong returns for several years. However, diversifying a portfolio while market conditions remain favorable can help mitigate the impact of a future bear market. The next significant decline may not occur immediately, but preparing now can reduce potential regret.