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The past 13 months have been brutal for the stocks of many individual companies.   Consider the followingJonG - professional2011 data1:

  • The Russell 3000 represents the 3000 largest US stocks or 98% of all US equities.  The average stock in this index is down 34.7% from its 52 week high.
  • The average large cap stock in the US (S&P 500) has held up better as it is only down 23.7% from its 52 week high.

Bear markets are part of the investment cycle.  In fact, in the past 100 years, there have been 32 bear markets where losses in stocks have been 20% or greater.2  On average, a bear market happens once every 3 years or so.    Vanguard looked at the last seven of these bear markets and complied the following statistics:

  • The average return for global stocks during the bear market was -33.4%.
  • The average number of days from the start of a bear market to its bottom was 373 days. The fastest decline was 60 days, while the slowest was 926 days.

While tough to stomach losses, all bear markets eventually come to an end and pave the way for future gains.  How long does it take recover losses?  Vanguard found that the average number of days from a bear market trough to recovery was 798 days. The quickest recovery was 85 days, the slowest 1,928 days (5.3 years).

So if we are in a bear market, why not sell stocks now?  Market timing is nearly impossible.  Not only does one need to know when to sell but also when to buy.  Many investors profess that they will buy when things feel better.  Most of the time, this is when prices already are much higher.  In fact, looking at the past nine bear markets in global stocks, performance one year after a 20% fall in price, the market is up on average by 20%.  Five years out the market is up on average by 81%.3  If you wait until you feel better to reinvest, you may miss a bulk of the gains as they usually come in the first year.

As an investor, do not let fear drive your portfolio decisions.  Could this bear market get worse?  You bet.  Stress test your portfolio and make sure you are comfortable with the amount of downside risk in the portfolio.  Diversification helps one to survive a bear market.  By owning several asset classes, this gives one an opportunity basket to sell and buy those assets that have declined in price.  Have a plan to be proactive in the sell-off.  Lastly, being out of the market is more detrimental to the long term health of your portfolio than avoiding a bear market.

Sources:

1 Micheal Comeau, Minyanville.com.  Stock Market Averages vs. the Average Stock.  February 16, 2016.  https://www.minyanville.com/buzz/bookmark.php?id=203080 (subscription required)

Vanguard, Corrections and bear markets: What does Vanguard think? January 28, 2016. https://personal.vanguard.com/us/insights/article/market-correction-vanguard-perspective-012016

Ben Carlson, When Global Stocks Go on Sale.  February 10, 2016
http://awealthofcommonsense.com/2016/02/when-global-stocks-go-on-sale/

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As Chief Investment Officer for Planning Solutions Group, Jon provides innovative investment planning strategies to our clients. He has over 15 years of experience in the financial services industry. Prior to joining Planning Solutions Group, Jon worked in the institutional market place. He provided investment advice to a client base consisting of large asset management and mutual fund companies, state retirement funds and hedge funds. His experience in the institutional market included Vice President of Institutional Sales for Deutsche Bank in Baltimore and Chicago. Prior to this, Jon worked as a research analyst for Croft-Leominster, an investment advisory firm in Baltimore. His focus was analyzing and recommending securities for inclusion in client portfolios. Jon is a Chartered Financial Analyst (CFA) charterholder. He has been recognized as a Five Star Wealth Manager, featured in Baltimore Magazine. He is also NASD Series 7 and 63 registered. Jon graduated from the Johns Hopkins University where he majored in economics. He lives in Towson, MD with his wife & two sons. To email Jon: jgiordani@psgplanning.com