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 drawdown of 10% or more from the high. But the Nasdaq Composite and the S&P 500 were both in a bear market in spring 2020, fall 2018, and, of course, during the 2008 financial crisis.

Bear markets can be stressful and nerve-racking. But over time, there’s a very good chance that you could benefit from a bear market. Here’s why.

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What does a bear market really mean?

Bear markets simply mean that equity values are plunging, so they only really hurt people with substantial assets. It’s a simple concept — so simple, in fact, that we often forget that bear markets impact wealthy people a lot more than the middle class or young investors. The stat that may really shock you is that the wealthiest 10% of Americans own — wait for it — 89% of the U.S. stock market.

The American middle class has most of their net worth in their homes. And if a middle-class family doesn’t plan on moving anytime soon, then it’s O.K. if the property value slips — especially after the surge in home prices we’ve seen over the last two years.

As a gross generalization, a bear market is going to negatively impact 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 (such as a new car), anyone that is a net saver, and anyone that is in the asset accumulation phase of their life.

But what about the real economy?

Granted, bear markets can also come during times of widespread economic hardship, such as rising unemployment. But according to the March 2022 Bureau of Labor Statistics report, the U.S. unemployment rate is currently 3.6%, which is tied with 2019 for the lowest level since 1969.

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

With income on the rise and unemployment near record lows, it seems as though the lower and middle class 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 Dot-com bubble in the early 2000s wiped trillions of dollars in equity value off the market. Those that could buy and hold stocks like Amazon (NASDAQ: AMZN), Microsoft, or Google after the crash would go on to unlock some of the best returns in stock market history. The same thing goes for the 2008 financial crisis.

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

AMZN data by YCharts

Imagine a stock in your portfolio going down 93% and then becoming 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 over the long-term is an incredible strategy, but also one of the hardest to execute.

Years of benefits

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 fixating on who was lucky enough to have spare cash to buy great stocks during the absolute bottom of a bear market, it’s more helpful to ask who was able to buy stocks for the next five or 10 years after a bear market.

If we think back to the 2008 financial crisis, for example, the biggest beneficiaries were folks without a lot of savings who had yet to reach their highest income-earning years. Even better positioned were those who didn’t own homes or have mortgages who could benefit from the collapse in housing prices. This cohort would be anyone who is between the ages of roughly 40 and 55 today. In 2008, there were young adults maybe in their low- to mid-30s. And for the next 13 years, they got to experience one of the greatest bull markets in history.

Now you may be thinking that the age group of adults that haven’t yet reached their peak earning years, which is age 45 to 54, is a small number and not representative of the U.S. population. It may surprise you to learn 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 factors in kids. Of Americans aged 20 or 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 above age 44 either don’t own homes or don’t have significant investments in the stock market. This is all to say that, according to the data, most Americans probably stand to benefit from a stock market sell-off.

Staying cautiously optimistic

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

One of the simplest ways to outlast a bear market is to stick with industry-leading companies that have been through one, two, or maybe even several bear markets in the past. There are several companies out there right now that are down 30% or more from their highs that have done just that and could be worth a look.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares), Amazon, and Microsoft. The Motley Fool recommends Alphabet (C shares). The Motley Fool has a disclosure policy.

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