Bear Market Lessons – Things to Keep in Mind When You’re Nervous About the Markets
Bear Market Lessons
As we enter the final quarter of a dismal stock market year, I thought it appropriate to take this opportunity to educate and use it as a teachable moment. Yes, the first three quarters have been the worst we’ve seen in almost 20 years. Yes, it won’t be fun looking at those statements. That said, yes this is a normal course of investing. But don’t take my word, instead, let’s go to the history books. You see, I find during times like these we all too often forget the past and put too much weight on the present. As they say, memory is short, and those that don’t know the past are doomed to repeat it.
Let’s dive in so we can make sense of all this talk.
Bear Markets Are a Regular Occurrence
Here is my favorite chart, which comes with some nifty stats. Over the last 76 years, bear markets are a regular occurrence. They aren’t something to be feared, and quite honestly we know they will happen. As you can see by the above we can learn quite a bit. For starters, the average bear market is 1.1 years, while the average bull market is 5.9 years. Furthermore, since 1945 you can expect to be invested during a bear market about 15% of the time, and a bull market 85% of the time. In summary, bear markets are expected, and they are less severe and long as bull markets.
Rebounds During a Recession
Our next chart talks about recovery during a recession. I know it is a bit busy, but I’ll point out the key findings. The grey bars indicate recession periods and the green lines are the S&P 500 one-year annualized returns. What you can infer here is that the stock market rebounds before a recession is over. This speaks to the 6-month forward-looking nature of the markets, and why attempting to wait to invest until things seem rosy is a fool’s errand.
Timing the Market
This graph is all about timing the market, or shall I say how futile of an effort that is. Since 1980, nine of the best trading days happened in years the markets were down, and eleven of the worst trading days happened in years the markets were up. Not only that you can see by the above graph that most of the time the best and worst trading days happen relatively close together. Still, think you are smarter than the markets? I know I am not, so think again. Markets move quickly and the only way to realize their full benefits is to stay invested.
Riding It Out
This chart makes me sound like a broken record, but still, I have to show it. It sounds like lazy, boring advice to tell people to ride out downturns. I almost get sick of saying the same thing over and over again, to be honest. That said it is what investors need to hear during any downturn. The only way to get through any market downturn is to ride the wave (as my Jersey shore personality shines). As you can see from the above going to cash during different down periods and reinvesting almost never works out in your favor. Do you want the full benefits of the markets? Ride that wave dude!
Markets Aren’t Political
Raise your hand if you dislike President Biden. Now raise your hand if you disliked President Trump. Now raise your hand if you think your party has a better stock market return. As you can see from the above the party in power isn’t the driver of stock market returns. Do yourself a favor and try to bifurcate these two things. It is ok to dislike one party’s policies or direction, that is the beauty of our system. That said, two things to infer: the markets don’t care and neither should you when it comes to your investing strategy.
On Market Downturns
Not only are market declines normal in a bad year, but they are also normal in great years. As you can see from the above chart downturns should not be something to be feared, but rather embraced. They will happen, should happen, and when they do know it is a normal course of doing business.
The Average Investor
Last one I promise! Are you smarter than a 5th grader, or the markets? Quick, what is the State capital of Wyoming? Agreed, I have no idea either. Now as the chart suggests not only are we not smarter than a 5th grader, the average investor isn’t smarter than the markets. As a matter of fact, the average investor is half as successful over the last twenty years as a 60/40 boring portfolio. Why is that? Because the average investor acts emotionally and tries to time the markets when they simply cannot be timed.
Conclusion
Look I am not going to pretend these are not tough times. I am also not going to pretend when you look at your investments this year it is best to be done with a fine bottle of red wine, I prefer Napa reds. That said the strategy is simple, my colleagues and I will continue to tell you the advice you need to hear not the advice you want to hear. Stay the course, we are here for you, and this time is no different.
Do not hesitate to reach out and hopefully, information and guidance like this give you the confidence you need that you have chosen the right financial partner is us here at Diversified.
Stay wealthy, healthy, and happy everyone.
If you prefer to watch our blogs instead of reading them, here is the video version:
