WHY BEAR MARKETS DON’T MATTER
If you’ve been listening to the financial media of late you have no doubt heard some of the so-called experts prognosticating on the prospect of the next big bear market. Unquestionably, the stock market is at another crossroads, and its 7 percent increase year-to-date belies the concerns that most people have over the global economy.
So, gloom and doom forecasts by a media anxious to sell papers or air time, should not be at all surprising. Even if we were to buy into the media hype, should we be at all concerned? In the overall scheme of things, should bear markets even matter to us?
Bear Markets are Healthy for Long Term Returns
We submit that the only thing about bear markets that should matter to investors is how they react to them. First, no one should be surprised when a bear market occurs. They happen with some regularity. While we can’t really predict when they will occur, we know that they will. And we also know that they will eventually give way to another bull market. In fact, there have been 23 bear markets in the last 100 years, each followed by a bull market.
But here is the more important factoid that investors need to know. The average duration of a bear market in that time period is 11 months as compared with the average duration of 32 months for the bull markets. More importantly, the average decline of the bear markets is 27 percent while the average increase of the bull markets has been 119 percent. So, even with the same number of bear markets as bull markets, the stock market has still advanced more than 100-fold since WWII.
The takeaway for investors is that the advances made during bull markets are permanent, while losses during bear markets are only temporary. With each bull market, the losses of the preceding bear market decline were made up and the gains of the prior bull market were extended. In that perspective, bear markets are nothing more than a temporary interruption of a longer-term uptrend.
For long term investors, bear markets are healthy and necessary without which there would be no risk premium available in the market from which to generate returns. In essence, it is an efficient market’s way of pricing in the extreme unpredictability of long term returns in the shorter term. Investors with patience and the discipline to continue to invest during bear markets will be rewarded with higher returns during the bull markets.
There is no need to succumb to the noise and the hype. With history as our guide, investors can apply the three principles of intelligent investing as key weapons against panic:
- Faith in the future –With history as our guide we don’t know exactly how things will turn out all right; we just know that they will turn out all right.
- Patience –While we can’t say with certainty when everything is going to turn out all right; we just know that it will eventually.
- Discipline –Disciplined investors know that what appears to be working right now is not nearly as important as what has always worked. Discipline is the adherence to those things that have most reliably always worked.