It’s been ugly out there for investment portfolios.
Risk and growth assets have been getting hit hard. For example, as of this writing1, the Nasdaq is off almost 29%, which as a percentage, is near the COVID drawdown of 2020. Speculative positions like bitcoin have lost over half their value from where they were last year, and innovative tech featured in Cathie Wood’s popular ARKK ETF have been slashed an astounding 72% from its highs. Though the DOW and S&P 500 haven’t yet hit classic bear market levels of a 20% decline there is a lot of pain out there in stocks depending on the sector and index.
Due to rising interest rates, typical places to hide—like bonds—have not been a place of refuge either. Vanguard Total Bond Market ETF is off almost exactly as much as the 30 stocks that make up the Dow Jones Industrial Average.
Even diversified investment portfolios have not felt very diverse.
And cash may be king for the moment, but its conservative crown can’t get too cocky, as cash is getting repeatedly jabbed in the face by inflation which is rusting away the purchasing power of dollars in the bank. Despite interest rate increases elsewhere, a $100,000 savings account still earns next to nothing and is losing approximately $8 grand in purchasing power per year at the current US consumer price index level.
This is one of those times when investors cry out, “How long?!?”
Hold up a ‘sec though. Take a deep breath. Remind yourself that this happens often. Bear markets are a normal part of market cycles.
Are you surprised? You shouldn’t be.
Edward Jones put out a piece last year that showed that a 20%+ bear market drop has occurred about 33 times in the DOW since 1900, which averages out to about one every three years.2 According to Hartford Funds, the S&P 500, a more comprehensive stock index of the largest American companies, is similar and takes place “every 3.6 years.”3
This means that if you stay invested, like most people do, in their retirement accounts at least, you should expect about 14 bear markets in the S&P 500 over a lifetime of investing (about 50 years).4
Contending with bear markets come with the territory of building long term investment wealth. Volatility is the subscription price you pay for investing in the stock market to reap long-term returns. If you can’t endure bear markets and invest during them, you will probably make bad decisions at the worst possible moment.
Long term investors need to look at them optimistically. Shelby Cullom Davis said, “You make most of your money in a bear market; you just don’t realize it at the time.”5 Of course, this assumes that not only are you staying invested within them but that you are also buying during the downtrend.
The good news about the length of bad markets is that they tend to be shorter than bull markets. Hartford Funds research shows that from 1929, “The average length of a bear market is 289 days, or about 9.6 months. That’s significantly shorter than the average length of a bull market, which is 991 days or 2.7 years.”6
Ben Carlson, a portfolio manager for institutions and individuals, whose data is laid out in the chart at the top of this article shows that in the 15 bear markets since 1950, “…the average downturn is a loss of 30%, lasting just under a year to reach the bottom and taking a little more than one-and-a-half years to break even.”7
Averages don’t tell the whole story though. Some can take years. Others can resolve quickly in months.
So, how long? We don’t know. Could be much longer or much faster than you think. Prepare for both.
You might ask, “Why not get out during the bear and back in during the bull?” Good question.
The answer might surprise you: “Half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market.”8 You can’t know for certain exactly where the bottom is and when the bear goes off to hibernate and the market resumes its upward and bullish trend.
Therefore, living through them—as opposed to getting out of them—is key.
The voice of history may not be as loud and dire as some market pundits on television, forwarded emails from Cousin Leonard, and your social media feed, but it calmly reminds us that this too shall pass.
1. May 19, 2022.
5. Quoted by Eddy Elfenbein in CWS Market Review - May 10, 2022.
6. See “10 Things You Should Know About Bear Markets” above.
8. See “10 Things You Should Know About Bear Markets” above.