By Robert Laura, AFC, AAMS, CMFC, CRPC
Like many of you I received my 401(k) statement this weekend and much to my chagrin, I wasn’t moving closer to retirement. So I spent some time doing some research on the market conditions we are currently experiencing.
As many of you know we recently entered a “Bear Market.” This is commonly defined as a 20% drop from a market high. Back in October 9, 2007 the Dow Jones Industrial Average peaked at 14,167. Then on June 27th, 2008 it dipped below the 20% mark.
The good news is that once the decline reaches the arbitrary 20% mark, based on history, the market has suffered most of its losses. In fact, by the time the market was down the requisite 20%, the average bear market was 74% complete. While this may mean there’s some additional issues to deal with, statistically speaking the worst may be over.
In my opinion the real danger of a bear market is the impact it can have on individual investors. Bear markets can last anywhere from 3 months, as evidenced by the 1987 downturn, or as painfully long as the 21 month bear of 1973. This can wear on the psyche of investors who decide to exit the market at the worst possible time, the bottom.
Fortunately, bear markets are only half of the cycle, and represent the much smaller half of it. Since 1950, the nine bull market advances following a bear market lasted four times longer with an average gain of 165.7% (2). Additionally, ever since Harry Truman trumped Thomas Dewey in the 1948, the Standard & Poor’s 500-stock index has averaged a 9.69% gain during Presidential election years, which gives me a reason to see the investment glass as half full (3).
The reality is, every bear market is different. They are a common part of the investment process as evidenced by the approximately 11 bear markets from 1940 (4). Furthermore, even superstar investors like Warren Buffet whose Berkshire Hathaway shares are off 21% from its peak, aren’t immune to a market downturn.
It’s common for investors to be concerned during economic downtimes, but it’s more important that they be aware of the factors affecting their portfolio. Find a financial professional to educate you on events driving the market right now, such as how bond funds typically perform in an environment of increasing interest rates; what sectors of the economy may be best suited for withstanding a long-term bear market; and which companies are likely to be on the front end of a recovery. The biggest risk you face, in both a good and bad stock market cycles, is remaining uneducated.
Robert Laura is the Senior Vice President of Wealth Management for First National Bank in Howell. He is a professional financial speaker, the author of Financial Karma and The Five Most Important Things They Don’t Teach You In School, and maintains the FinancialFYI.com website for interesting financial news, statistics, and research.