Bear Markets Have a Habit of Bearing Fruit
Be fearful when others are greedy,
and be greedy only when others are fearful.— Warren Buffett
Like many great pieces of investment advice, doing what Warren Buffett famously quoted can be much harder than expected in practice. After all, family, friends, and fellow investors may be panicking over what is happening in markets recently after the news reported that the US is currently in a bear market.
What does a bear market really mean for your goals and dreams? Is it a signal to sell or buy? The uncertainty and the weight of not knowing what to expect is very often too much for many investors to bear. It is very common to want to sell and exit all of your investments when things look scary, and to come back in when you feel that the coast is clear (just like the diagram below). However, that would definitely not be the best course of action.
What is a Bear Market?
A bear market is a term coined by Wall Street to describe a market which has suffered a correction or loss of -20% or more. Why -20%? It’s merely an arbitrary number; by that definition, since 1970 global stocks have undergone 6 bear markets (shown below), taking up approximately 14% of its history. Conversely, that means that markets, 85% of the time, were not in a bear market.
Bear versus Bull Markets
The chart below shows a comparison of bear and bull markets. The early 1970’s sell off fell short of the the bear market definition (-19.1%) but is included to show the extent and duration of the sell-off. Bear markets can come in all shapes and sizes but the key lesson here is that bear markets are short in comparison to bull market trends — so more often than not, there is nothing to fear. However,if you panic during the bear market, get out of investing, jumping back in will be hard and costly as stock prices would have increased — you would be buying in at a more expensive level.
What Comes After?
History and the decades of investment data that comes with it can help to provide some perspective. Sudden market downturns can be unsettling for sure, that much we understand. However, you should know that historically, bear markets are usually temporary and do not last for a long time. On average, data shows that equity returns following sharp declines have been positive. A broad market index tracking data since 1926 in the US shows that stocks have tended to deliver positive returns over one-year, three-year, and five-year periods following steep declines (see below).
The data collected across decades makes a decently strong case to alleviate fears and worries surrounding market declines (even steep ones) if you’re diversified globally — save yourself some sleepless nights and carry on investing. Bear markets are usually temporary and the statistically likely handsome rebounds after such steep declines will help put you in an excellent position to capture the long-term benefits the markets have to offer.
In fact, investors with assets to spare can deploy it during volatile markets such as these can put their money to work, turbocharging their long-term gains. If you want to know more, come and have a chat with us.
