What History Tells Us About Getting Through a Bear Market
Written by
James Holbach
Edited by
Ashleigh Ray
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Suffering through a bear market is never pleasant, even for professional investment managers with years of experience. The Wall Street axiom of “buy low, sell high” sounds easy enough to accomplish in theory, but the reality is far more challenging.
In the teeth of a bear market, it’s hard to buy anything. The causes of a bear market vary but will generally be some major negative event — things like a market bubble bursting, a large-scale public health or geopolitical crisis, or major changes in monetary policy — that cause a rapid decline in investor confidence. Toss in the emotional pain that goes with losing 20% to 50% or more on individual stocks, and it’s no wonder why no one wants to “buy low.”
But history hasshown usthat no matter how painful a selloff may be, the stock market has always recovered and gone on to make new highs. Whether or not you’re able to successfully weather a bear market will depend on your ability to wait it out without making potentially costly mistakes. Here’s what history tells us about getting through a bear market.
The Average Bear Market Drops Over 30%
A 20% drop from the market’s most recent high marks an “official” bear market, but it’s rare that the damage stops right at the 20% level and immediately reverses course.
Looking at historical data again, we see that on average a bear market falls about 35% percent. But the worst part of most bear markets isn’t really how much they fall, it’s that many investors get scared out of the market after such big declines.
Seeing their portfolios decline dramatically can make many investors try to stop the bleeding by selling off their positions in the belief that they will get back in when the market turns around. Timing the market successfully is virtually impossible, however, and many investors end up selling low and buying high, long after the market has recovered.
In fact, part of the reason that markets recover is that selling pressure abates, as investors have already dumped their positions and there are fewer sellers in the market.
The Average Bear Market Lasts About 9 Months
Looking at historical data back to 1929 tells us that the average bear market lasts 292 days, or just about 9 months. While this certainly feels like a long time while you’re in the thick of it, it’s actually a fairly short period of time when you consider the stock market’s long-term historical record.
By way of comparison, the same historical data shows that the average bull market lasts 992 days – that’s about 2.7 years, three times as long.If you can manage to endure the pain of a bear market, you’re generally rewarded with a long period of recovery in which prices go on to set new highs over a relatively long time period.
What A Market Recovery Looks Like
Most investors dread bear markets, but they are in fact a normal part of the business cycle in our economy.
Economists typically define the business cycle as having four parts:expansion, peak, contraction, and trough. As you might imagine, bear markets typically start during the contraction phase and into the trough phase, which helps to set them up for recovery. But what does recovery look like?
Generally, the expansion part of the business cycle is when the economy goes from negative growth to positive. The hallmarks of this recovery include low business inventories, rapidly increasing sales, rising industrial production and a positive gross domestic product. Recoveries are typically prompted by the increased availability of credit and low interest rates, which is often the result of activity by the Federal Reserve.
How To Protect Yourself in Bear Markets
Although it’s impossible to predict the exact onset of a bear market, understanding the business cycle can clue you in to what economic indicators to look for that might drag down the stock market.
A variety of factors can indicate a possible recession or bear market, including declining corporate profits, high interest rates and the scarcity of credit, contracting economic activity and an inverted yield curve (when interest rate yields on short-term bonds exceed the yield of long-term bonds).
If you find yourself in a bear market, it’s critical to avoid making investment decisions based on emotion. Don’t micromanage your portfolio; checking your balance constantly will just make you feel worse. Take a long-term perspective and remember that a bear market doesn’t last forever.
Dollar-cost averaging is a good way to both remove emotions from your investing and to “buy low,” as you’ll be consistently buying shares on the way down. While this can increase your losses over the short-term, when the market eventually recovers to new highs, you’ll be rewarded for those purchases you made while the market was down.
The best way to get through a bear market is to stick to your plan. If you invest primarily in index funds, stay the course. If you own individual stocks, review your portfolio and consider reducing your position in companies that have seen a material change in their business.
Most importantly, continue to add money to your portfolio on a regular basis throughout the bear market.
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John Csiszar contributed to the reporting for this article.
