A recent Vanguard blog discusses the challenges faced when trying to predict a market downturn. “While all bear markets involve a loss of investor confidence,” it says, “an assortment of factors can cause them,” including change in monetary policy, political events, and overvalued stocks. Even if you could predict such factors, the article argues, it’s hard to tell how they would affect equities.
The article illustrates the differences between the last two bear markets—namely, the “tech crash” and the “global financial crisis”– to demonstrate how challenging it can be to “identify which sectors and segments of the market are susceptible to a future downturn.”
The article also highlights how market “leaders and laggards” shift depending on the type of analysis performed and, further, that there’s no guarantee that a market segment that performs well in one bear market will do so in the next.
“Unfortunately,” the article concludes, “no one equity sector or fund style is a guaranteed ‘safe’ choice during the next bear market.” However, it offers the following suggestions “to increase your chances of investing success under any market conditions:”
- Determine which investment strategy works for you—keeping in mind that “index vs. active isn’t an all-or-nothing decision—you can combine fund types within your portfolio.”
- Choose low-cost funds.
- Be patient—market performance is unpredictable, and even the most successful fund managers go through periods of underperformance.