We’ve all been fooled.
The long bull market run that started in March 2009 and continued well into 2018 tricked many investors into believing that markets might climb forever at the continued and historically low volatility we’d all enjoyed for so long.
Then in October, that unabated progress – the upward march of equities to a chimeric beat that would have made John Philip Sousa proud – ground to a halt. The return of volatility over the course of the ensuing months was a not-so-welcome reminder that climbing markets do, in fact, correct.
In these troubled times when the threats to continued economic growth dwarf the opportunities for it, all investors would do well to remember a few key bear market facts to help us get through the coming weeks … months … or even years.
Before we mitigate the all-enveloping fear of the unknown with some much-needed facts about the eminent survivability of bear markets, let’s first review your portfolio management strategy.
If your advisor has done his or her job, you may not have to worry about volatility.
Any advisory relationship worth its salt would have ensured that your portfolio is already built to mitigate the risk of an upcoming downturn in the markets to the exact degree that your family is willing and able to stomach losses. If you have at least semi-annual reviews with your financial planner and if the content of those meetings has included some key points about the specifics of your family’s financial situation, then your portfolio should be prepared for a market loss even if you aren’t.
Those most at risk during volatile times for equities are investors within five years of retirement (both five years before and after the date of retirement). as well as those investors who plan on taking distributions of a considerable sum from their portfolio in the coming year or two. A considerable sum might be more than 4 percent or it could be more than 10 percent, depending on your intentions for and the quantity of continued distributions over the ensuing years.
As always, if you aren’t sure whether you are taking the right amount of risk in your portfolio for your situation, you would do well to immediately engage the guidance and support of a certified financial planner.
It is often too late to address the risk in your portfolio when it is already in the red, so let’s consider some key facts about bear markets that can help you to emotionally sustain your investment and planning strategy even in the toughest downturn.
Typically economists define a “bear market” as a market that has lost 20 percent of its value from a peak. Many stock indices were well into correction territory toward the end of 2018, though some have recovered dramatically since the beginning of this year.
Since World War II, average bear market losses hovered around 30.4 percent from their respective peaks and they lasted approximately 13 months. According to an analysis done by Goldman Sachs and CNBC, it usually takes stocks 22 months to recover from a bear market, on average.
By contrast it is worth noting that a “correction” is a roughly 10 percent drop in stock market valuations from a peak and that corrections, on average, bottom out around 13 percent and last four months.
Between 1900 and 2013 there were 123 corrections and 32 bear markets. This means that a bear market occurred every 3.5 years and at least one correction occurred every year. For context, the S&P 500 index suffered approximately seven corrections from 2009 through February of 2018, if you are counting two “near corrections” that saw drops of 9.8 percent and 9.9 percent.
Nothing is forever
And finally I’d like to underscore an earlier point about the temporal nature of bear markets. Recovery from an average bear market since World War II has taken, on average, less than two years.
Every bear market I’ve worked through in this industry has felt like a never-ending free-fall. Investors’ fears are often exacerbated by breathless television coverage of economic malaise and terrifying factoids about each downturn. Nearly every televised statement about bear markets when we are in their midst feels as if it is punctuated by an exclamation point. My advice here is to read the news in reputable, fact-based publications (Wall Street Journal, Financial Times, The Economist, etc.), and don’t watch it on television.
You will survive
With the help of a team of qualified advisers, the next protracted economic downturn, when it does come, should prove to be as manageable as every previous one. You’ve survived them, and you will survive the next one too.
Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.