Since 1929, the S&P 500 has been through 26 bear markets. Stocks lose on average 36%. The worst bear market resulted in a loss of 86% over three years in 1929. In contrast, bull markets increased on average by 114%.
Bears and bulls
Bear markets are generally defined as a drop in the markets by 20% or more. Since 1929, the S&P 500 has experienced 301 dips of 5% or more, 95 moderate corrections of 10% or more, and 43 severe corrections of 15% or more. The average bear market lasts 9,6 months.
Over a 50-year investment horizon, the average investor will live through 14 bear markets, or one every 3,6 years.
Bear markets do not necessarily mean a recession – there were only 15 recessions in this period.
Bull markets are generally defined as a gain of more than 20%. There have been 25 bull markets since 1929, lasting on average 3,4 years, and with an average gain of 114%. The largest gain was 582% from 1987 to 2000. The longest bull market was 11 years ending with the COVID-19 crisis in 2020. They say those bulls that bounce back the fastest also last the longest.
Courtesy of CNBC on S&P 500: The S&P 500 has averaged 10% per annum since 1929.
The FTSI/JSE All Share Index (ALSI) tells a similar story. In the last 60 years, there were 10 bear markets and 11 bull markets. The bears lasted an average of 9 months, losing on average 35%. The bulls lasted an average of 57 months with an average gain of 332%.
When to buy, sell or hold?
The research shows that investors in timing the market and not controlling their behaviours underperform the markets by 4% on average (Dalbar).
A CBS News study ‘Investors who stayed the course in 2008–2009 were the big winners’ showed that Fidelity 401(k) investors who switched to cash, then back into equities in the bear market of October 2008 to March 2009, gained 25% to June 2011. Those who remained fully invested made 50% − double!
The reasons to trade stocks are varied but succumbing to ‘fear or greed’ is costly.
Having a strategy to understand one’s risk tolerance and time horizon is key. Your investment portfolio should be designed and managed to deal with this. A retirement portfolio is likely to have a lower equity component, therefore be less risky, albeit with moderated returns, than someone starting their savings plans in their twenties, who would likely be fully invested in equities with higher returns in the long term.
Remember the basics
- After every bear there is a bull.
- The bulls tend to run longer and have more momentum than the bears.
- You only have a real loss locked in when you cash in the investment – otherwise it’s a ‘paper’ loss.
- Timing the market rarely favours investors.
- Avoid drawing down on equity investments in bear markets and realising the losses – it’s also harder to make up.
- Keep liquidity in your portfolio to ride out the bear markets – implement a strategy for your objectives.
- It’s always a good time to invest and to do so regularly,
- Markets succeed more often than investors.
Mike Lledo CA(SA)
Independent Financial Services Consultant