October 9, 2007. The Dow Jones closes above 14,000 for it's all time high. September 10, 2008. The Dow Jones closed at 11,268. That is a 2732 point or 19.5% drop. That feels just as good as selecting Tom Brady for your fantasy football league team this year. (For non-football fans, he just got injured and will be out the rest of the year.) This is what we refer to as a bear market.
Beware of the Bear
Not that long ago, the idea of a bear market seemed almost inconceivable. We've had a bull market since early part of 2003, watching the Dow go from 7,200 to it's high of 14,000 last year. Many investors are worried and rightfully so. Soaring gas and oil prices. A housing market in a mess. Large banks taking million dollar losses seems almost every other day. The recent government bail out of Freddie Mac and Fannie Mae. Investors have reasons to be worried. Welcome to the bear market.
Weathering a down market can be frustrating — especially if you’re using the same investing strategies that worked well when the market was on its way up. In fact, surviving a bear market requires patience, a long-term perspective, and the use of different strategies to help minimize the impact of falling stock prices on your portfolio.
Putting Market Returns in Perspective
Bear markets are nothing new. And that's something that all investors must come to grips with. Since 1950, the S&P 500 has undergone nine bear markets. The average bear market has lasted about 35 months, and the market has fallen by an average of 31.7%. In contrast, the nine bull markets during this time period lasted more than four years on average, with an average gain of 136.2%.1
The most recent market downturn follows the longest economic expansion in our nation’s history; between 1991 and 2000, U.S. output as measured by Gross Domestic Product increased by an annual average of 7.3%.2 During this same period, stock markets clocked in exceptional performance, with the S&P 500, a benchmark for U.S. stocks, gaining more than 18% annually.1
But such growth is the exception, not the norm. Over the past 50 years, the S&P 500 has recorded a more modest 11.0% average annual return. And if the boom years of the late 1990s are excluded from this figure, the S&P 500 average advance was only 9.2%.1 Accordingly, if you are to survive a bear market, the first thing you need to do is readjust your sights from the unsustainable performance levels achieved in the late 1990s.
More from GFC, Below
Should You Sell?
Many investors get nervous during such a stretch. That's when I have to reassure my clients that market will prevail, and then reevaluate our goals. Certain failure in the market most often stems from short-term thinking. Before selling, you should consider several factors. First, look at your time horizon; i.e., when will you need to use the invested funds. If you are investing for the long term — for retirement, for instance — then there’s a strong likelihood that the market will rebound before you need to use the funds. Second, consider your alternatives. If you take your money out of equities, where will you invest it? Remember that in the long term, stocks have outperformed the other asset classes — bonds and money market securities — by a significant margin, although past performance is no guarantee of future returns.
Maintain a Portfolio That’s Right for You
If you haven’t already done so, take a good look at your investments as a whole. What is your portfolio’s asset allocation — your mix of stocks, bonds, and cash equivalents? As long as your portfolio matches your risk tolerance, you should better prepared to handle such market swings.
Reviewing your asset allocation can help you answer another question about your portfolio: Is it adequately diversified? In other words, have you spread your money among different investments to potentially help reduce risk? Different securities do better at different times. As an example, a more conservative strategy may actually fair worse than an aggressive strategy in the short run. Revisiting your goals will help define your proper portfolio allocation.
Finally, call me. I can help make sense of your current situation and help you evaluate your portfolio's strategy.
Four Tips for Surviving Bear Markets
- A plan will get you started in the right direction. Implement a well-thought-out investment plan and then stick with it. You may increase your chances of being around when the bull takes its next run.
- Do Not Listen To The Media! Do not make investment decisions based on short-term market drops or gains. Instead, evaluate how an investment fits into your overall financial strategy.
- Everybody likes a sale. Look at a bear market as a buying opportunity. Some stocks may be undervalued following a broad market decline, allowing you to invest more in high-quality companies.
- Pick up the phone and dial. If you need further reassurance, contact your financial advisor for a review of your portfolio. If you are a client, call me to discuss.