What history tells us about bear markets

2 Apr 2020
John Drysdale
A 10 minute read
by Jon Drysdale

What history tells us about bear markets

This article provides a long-term perspective on investing. Please note that it is not intended as recommendation to invest at this time and any investment decisions should be made after discussion with your adviser. The original source of the article is credited to Greg Davies Chief Investment Officer at Vanguard Asset Management .

Perhaps the two words that investors fear most are “bear market”. A drop of 20% or more in asset prices can shake the confidence of any investor, especially the longer it takes for a recovery to begin. In the last 20 years, we’ve experienced two bear markets in global stocks that have lasted more than a year with declines greater than 50%.

Of course, bear markets are a fact of investing. It’s easy to lose sight of that coming out of a largely bullish decade, where we saw a sustained rise in share prices. It’s also easy to lose sight of another fact of investing, which is that bear markets end. Investors who have stuck out bear markets have been rewarded for their perseverance with bull-market returns that can more than make up for the preceding losses.

Bear markets are tough; so is missing out on bull markets

A long-term view of the market can hide the ups and downs. A closer look shows that global bull market returns have more than made up for bear market losses. Sticking with your investment plan might seem challenging if you’ve been caught off guard by the markets. But your adviser will have ensured that your investment mix matches your risk tolerance and spending needs. Staying the course can be the right decision for reaching long-term financial goals.

Here are a few simple reminders to help you through the uncertainty.

Equity bear markets are common

Bear markets occur frequently. Since 1980, there have been seven bear markets in the United States. In the United Kingdom, there were five bear markets during the same period.

The key to getting through the turbulence is to understand that market swings are normal and relatively insignificant over the long haul.

It’s also helpful to consider the relationship between bear markets and recessions. In short, they’re far from synonymous. A bear market occurred in only three of the last 14 US recessions, and positive equity returns accompanied seven of those recessions. Conversely, it’s not uncommon to see lacklustre or even negative asset returns in years of solid economic performance.

Tune out the noise

It’s important to recognise that shifting your portfolio in the hope of avoiding a loss or netting a gain rarely works and could hurt long-term performance.

From 2000 to 2019, the Standard & Poor’s 500 Index had a compound annual return of 6.1%. But if the ten best days during that period were excluded, the index would have had just a 2.4% compound annual return. Excluding the 25 best days, it would have had a –1.0% compound annual return . Staying invested in the market is key, because after a downturn you might not have to wait long to see one of those “good” market days. The best and worst days tend to cluster together —a major reason why successful market timing is largely a myth.

Maintain perspective and discipline in the face of adversity

Investing can provoke strong emotions. In the face of market turmoil, some investors may find themselves making impulsive decisions or, conversely, becoming paralysed, unable to implement an investment strategy or to rebalance a portfolio as needed. Discipline and perspective can help us remain committed to long-term investment programmes through periods of market uncertainty.

Remain patient and consider staying invested in a broad mix of global stocks and high-quality bonds so that you are better positioned to buffer declines in the equity market. Investing across global markets can help protect against domestic shocks. Periodically rebalancing your portfolio can keep your asset allocation in line with your investment goals.

No one knows what the future holds. But understanding the past can help us avoid impulsive decisions that may cause far more harm than good to a portfolio’s long-term value.

Investment risk information: The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.