History Shows the Investors Who Make This 1 Move During Bear Markets Build the Most Wealth

Nobody likes bear markets.

But every investor knows they’ll suffer through at least a few of them. Data gathered by mutual fund company Hartford indicates a bear market materializes about once every three and a half years, taking an average toll of 35% on the S&P 500‘s (^GSPC -0.37%) value. It’s understandable why anyone would attempt to sidestep them.

What if, however, rather than playing defense against bear markets, an investor made a point of playing offense during them? In other words, what if you were an aggressive buyer rather than a seller during and because of a bear market? In the long run, you’d be a lot better off. Here’s why.

What Warren Buffett’s got to say about the matter

Don’t misunderstand. You shouldn’t sell your long-term holdings at what looks like the end of a bull market and the beginning of a bear market just to have plenty of cash ready to deploy; the likelihood of successfully spotting a peak and then also successfully identifying the exact bottom is slim anyway.

Like it or not, you’ll want to stick with your existing long-term positions through bear markets, even though they’re struggling. There’s much to be said for being ready when these inevitable opportunities surface, though.

Image source: Getty Images.

That’s how Berkshire Hathaway‘s legendary stock picker Warren Buffett feels anyway. As he said in 2016’s Berkshire shareholder letter, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”

He recently reiterated the tip, too. In an interview with CNBC in March, Buffett explained of Berkshire’s then-growing cash hoard, “I always want to have cash.” He then added, “and I never want to buy anything just because people think the market is going up,” hinting that he’s waiting for more attractive valuations rather than succumbing to pressure to put all that money to work. You should do the same.

Numbers, for perspective

That doesn’t mean Buffett thinks he’d have any more luck spotting the market’s cyclical peaks and troughs than anyone else would. He knows he can’t. He only knows these setbacks happen from time to time, and they’re opportunities when they do.

If you’re disciplined enough to wait for them and then bold enough to dive in when they materialize, what opportunities they are! The average bear market pullback of 35% is a nice discount of the average bull market’s gain of 112% (again, according to Hartford). Even if you were only able to improve the S&P 500’s long-term average annual gain of 10% to a very doable average of 11% per year — by diving in big-time in the middle of a bear market — in 30 years you’d be sitting on about one-third more than you’d have at the lower average yearly return.

It’s admittedly not easy to do this, and you certainly won’t do it perfectly. You don’t need perfect timing to take advantage of such an opportunity, though. You just need to remain focused on the longer term, recognizing that stocks have eventually recovered from every bear market they’ve ever been through. The next one isn’t likely to be any different.