Bear Markets Are Painful but Markets Rise Over Time

While it’s hard to watch the day-to-day meltdown in every major global market, we must remember that we’ve been here before. Yes, today’s markets, economies, and social order have been disrupted in an unprecedented way because of a virus pandemic. And we have, by many measures, fallen into bear market territory after erasing many years of gains. We must remember this: Bear markets are painful but markets rise over time.

These three graphs offer some perspective. According to a research note from Bank of America Securities, it has taken 1,100 trading days on average to regain the territory lost during a bear market.

It May Be Different This Time

There’s an old saw about how investors get deluded by whatever is new or shiny or special and say the four words that are a sign of a problem to come: This time it’s different. Invariably, when investors believe that, they are then slapped by the cold hand of reality proving once again how that is not the case.

Understandably, historical precedents might not help that much. Things are much bigger and wilder than they used to be and, in many cases, driven to new highs – until recently – and now to new lows with the “help” of computer-driven algorithms. The recently-deceased bull market was way, way longer than its predecessors, and the crash has been way faster than its predecessors in recent memory.

Knowing that stocks will probably recover and you’ll get back the gains if you sit tight has historically been what Warren Buffett (and most long-term investing pros) has recommended when he tells people to “own the market” via low-cost and low-maintenance S&P 500 index funds.

Look to earlier bear markets

Bear markets of the past do provide a roadmap of sorts for the types of declines investors can expect. The S&P 500, at its closing low Monday, March 17,2020 was 29.5% below its record high of 3,380.16 on February 14, 2020.

So how does that compare with other bears? The average bear market loss since 1929 is 40% and lasts 21 months, according to S&P Dow Jones Indices. It turns out that bear markets that occur during recessions (which many on Wall Street are calling for now due to coronavirus business stoppages) tend to be deeper (the average pullback is 37%) than ones that don’t involve recessions (24% decline).

Track the S&P 500 Index here https://us.spindices.com/indices/equity/sp-500

Track the Dow index here https://www.morningstar.com/etfs/xtks/1679/quote .

“Trading stocks over a one-day period is only marginally better than a coin-flip,” the Bank of America note said, also pointing out that “the best days usually follow the worst days,” which makes market-timing extremely difficult.

Even missing just the best 10 days of the stock market can kill your gains.

From 1999 to 2018, annualized return of the S&P 500 was 5.62%, but without the 10 best-performing days, your return would drop to 2.01%. Take out the next 10, and your return would sink to -0.33%.

The note also pointed out that equities are unique in being the only asset class that has performed really well over almost any big chunk of time.

The 2000s, which ended with a financial crisis, was the only decade outside of the 1930s that saw total negative returns.

Unless you need the losses for tax purposes, I would not sell stocks if you don’t need the money and can just wait it out. If you need cash and don’t have a sufficient cash reserve to provide you with a buffer for a few months or one year of fixed living expenses, then selectively raising cash makes sense.

This is a good time to reassess your own attitudes toward risk, and if you’re out of whack, then you should be making adjustments.