We’re in the midst of a bear market, and there is little comfort in the midst of a bear market. However, there is hope. How do I know? I’ve been here before. This is my fifth bear market as an investor.
Prior Market Downturns
As both a professional and personal investor, my memories of past bear markets are vivid and painful – some even visceral. Watching investment portfolio values go down day after day is one of the most anguishing experiences we may ever face. After all, this is our hard-earned money, representing hours of work, spanning entire careers in some cases. It can be agony to sit by while our sacrifices and efforts become worth a little less with each passing day.
My first bear market was Black Monday in October 1987. The market was down 32% before it began to rebound. Twenty months later, valuations returned to their previous levels. After that was the Tech Wreck in 2000. That bear market led to a 48% downturn with stock valuations remaining negative from their previous highs for seven years before fully recovering. Then the Great Financial Crisis came along in 2007. When the housing bubble bust, it pushed the stock market to lose 56% of its value from October 2007 to March 2009 before regaining ground in March 2013.
The Covid-19 coronavirus pandemic produced the next bear market in 2020 causing the fastest bear market in history, plunging 32% in a single month. Five months later the market had fully recovered and went on to historic highs until this past January when the market started its decline into bear market territory in June.
Looking back on these past downturns, I realize that each time I would find myself asking, “Is this bear market different than the others?” And, “Is there something I’m missing with regards to this one?” There aren’t easy answers to these questions.
Something in Common in Every Bear Market
All five bear markets had unique circumstances contributing to their causes, depths and lengths. Unfortunately, that means there’s no “average bear market blueprint” to help investors easily predict length and depth in real time. Any averages found in bear markets are calculated by market analysts after the fact, and any correlations between markets are best left to historians. Reliable insights from a bear market are never available until the stock market has returned to its pre-bear market values and investors’ worry-filled days, weeks and months are over.
While unpredictable in their specifics, there is one feature I find in common in every bear market I’ve experience—indeed in every bear market that has ever been: they rebound. Every bear market in the history has rebounded in its own time. In fact, it not only recovers from its losses but moves on to establish record highs. Even in the midst of the darkest days of a bear market, the historic fact of the rebound offers a ray of hope. Bear markets don’t last forever.
Moreover, we know that in the long-run stock markets outperform most other asset classes and can provide the types of returns investors need to outpace inflation and the returns produced by guaranteed financial assets.
You may be thinking, “I just have to wait? That seems risky.” Indeed, there is valid risk when investing for the long-term in the stock market. There is a chance the return of the investment may not be what you expected in the time frame you had hoped for. Investment risk produces volatility in stock market prices, but this should not be thought of as a flaw of the stock market rather as a feature of the stock market. If owning investments was risk-free, investors wouldn’t get paid a premium to own them.
Can I mitigate risk through diversification?
Some of the risk can be mitigated through diversification, but not completely. Since the beginning of January in 2022 the S&P 500 index dropped 20%. The S&P 500 is an index that has 500 different companies; it is extremely diverse. Diversification alone isn’t enough to eliminate investment risk. You can never completely eliminate risk when investing in the market.
Remember the Rebound
In the midst of a bear market, when investing feels risky, remember the rebound. And time is the key ingredient in a bear market rebound. That’s why we keep the long view in focus. Generally speaking, it’s not the markets that determine whether we reach our financial goals or not. It’s our own decision as investors. Keeping a long-view perspective from the middle of a bear market is challenging, but it means we must stay disciplined and stay invested while we wait. But it’s also an enormous comfort, because it means the power to control our financial future is always in our own hands. Wait for the rebound.
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Brad Lyons, CFP®