If a Bear Market Is Coming, History Says Investors Who Do This 1 Thing Always Win Out

Key Points

• The market is on track to post its fourth consecutive year of double-digit gains.

• Valuations are high, and that’s not sustainable in the long term.

• Bear markets give investors the opportunity to grab great bargains.

As the market gets closer to ending its fourth year of double-digit gains, it’s hard to imagine a bear market on the horizon. And it may not be coming just yet; the record for consecutive annual market gains is eight years in the 1980s.

If the year ends on a high note, though, it would be the first time since the 1990s that the S&P 500(SNPINDEX: ^GSPC) gains by a double-digit percentage for four years in a row.

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Data source: YCharts.

Even if this happens, that doesn’t mean there isn’t a bear market coming soon. Investors define market gains by year for consistency, but the market goes up and down every day, no matter the day of the year.

The market is excited about opportunities in artificial intelligence (AI), and it’s willing to price some stocks at astronomical levels because of what they’re expected to accomplish. The S&P 500’s valuation continues to creep higher as investors are willing to absorb high prices, but the market tends to be self-correcting. As famed investor Warren Buffett has pointed out, investors love a strong bull market, but prices that are uncoupled from performance won’t last.

Image source: Getty Images.

Whether a bear market enters before 2026 ends, next year, or any time after, investors who do this one thing will win out, according to history.

If a bear market comes, keep buying

First, let’s define what a bear market is. A bear market happens when a market index falls at least 20% from recent highs. This applies to just about any market, including the S&P 500, Nasdaq Composite, and Russell 2000. This can happen slowly or quickly, and it can happen expectedly or unexpectedly. For example, no one expected it when the market crashed in 2020 as the COVID-19 pandemic began, but if it happened now, it would be more expected given current economic indicators.

There are patterns and signals, but ultimately, there’s no way to know what will happen or when. What investors need to do to keep winning in any market is keep buying.

What actually leads to a sell-off? There’s something that negatively impacts market sentiment, and investors sell en masse out of fear. Once an investor does that, they turn paper losses into real losses. However, if they hang on, their losses are likely to reverse. At least that’s what has always happened in past bear markets.

Even more, if you ignore the fear, you can buy amazing stocks on sale and make your money work even harder. Consider that in 2022, when the S&P 500 lost nearly 20% of its value, both Amazon and Nvidia lost 50% of their value. At the time, buying stocks at those lows was probably scary. But investors who did buy then reap immense rewards. Here’s the total gain of the S&P 500, Amazon, and Nvidia since the start of 2023.

Data by YCharts.

There’s a saying that history doesn’t repeat, but it rhymes. Whenever the bear market comes, be prepared with some cash to get the best deals and hold on for better times.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.