On bears and corrections
Many investors live in fear of corrections and bear markets, even though they happen fairly regularly. This article is not a bear market call—we still like stocks–but if you’re interested in our proactive approach to helping you through the next one, keep reading. First, a few definitions and facts.
- Correction – generally defined as a drop of 10% or more from recent market highs
- Bear market – generally considered a decline of 20% or more and lasting 60+ days
On average, there has been a correction every year since 1900, with an average decline of 14% and 54 days in length. We experienced a correction in January 2018 along with six others since the current bull market began in 2009. How many of these can you remember? Not many, right? Here’s why…historically, only one in five corrections turn into a bear market.
Speaking of bears, nine times since 1950 the S&P 500 has fallen by more than 20%. This means a bear has occurred every 7 1/2 years over this period. On average, these bears lasted 431 days and posted a decline of 36%. The most recent one (2007-2009) lasted 517 days and saw a 57% drop in the S&P 500.
Okay, how about recovery time from a bear market? A “normal” bear (down 20%-40%) historically has taken roughly 15 months to eclipse the old high. That’s not bad. How about the really vicious bear markets (down more than 40%)? On average, these have taken just under five years from which to fully recover. Probably not as bad as you thought.
Before we open our bear market playbook, I thought I’d share our investing philosophy in a nutshell:
- Focus on what we can control: fees and expenses, investment mix, and behavior.
- Market timing doesn’t work. Staying fully invested to a targeted mix of investments does.
- Long term is the only term. Success is measured in years and decades.
- Market volatility is an opportunity to rebalance accounts (i.e. to buy low and sell high).
- Widely diversified portfolios mitigate risk.
We have three affections towards equities, all of which are positive: Like, Really Like, and Love. We are currently in the “Like” camp. Does this mean we think the market is going to tank? Absolutely not. We are just being cautious and mindful to protect your 2017 gains. So our bear market preparations actually begin during a bull market.
When we formally review your accounts each quarter, we pay attention to the following:
- Your cash needs. Are you taking monthly distributions or do you have an upcoming expense we need to plan for?
- Realizing gains from stocks that have outperformed and redeploying these monies elsewhere in your account. This helps ensure your account doesn’t become too concentrated in any single company or group of stocks.
- If an account has gotten too heavy to stocks, you might see activity to reign that in a bit.
Never in the history of the stock market has a bear market not turned into a bull market. When you hear someone say they lost a fortune in the stock market it’s because they made an incorrect decision. Often, this is the result of getting out of the market and not getting back in, buying a highly speculative stock and holding on too long, or working with an advisor who didn’t represent their best interests.
While the process of going through a bear is painful, and at times gut-wrenching, viewing them as opportunities and sticking with your plan is the best response. Now you know what to expect from us. – Jon S.