First some basics.
What is a bear market?
A stock market decline exceeding 20% is a common threshold for a “bear market designation”.
How long does a bear market last?
Investor experiences following these declines have been anything but uniform. In some cases, the market continued its descent past 20%, while at other times the losses topped out soon after crossing the -20% line.
What should an investor do in a bear market?
Historically, it has generally benefited investors to remain in the market, as the recovery to pre-decline levels was often swift – investors were made whole within a year in nine of the 15 bear markets since 1929 (shown in the chart below).
When does it make sense to de-risk or reduce stock market exposure in your portfolio?
I believe the only good reason to sell out of a stock portfolio now – assuming it is a diversified low cost portfolio – is because you learned something about your risk tolerance or your investment goals have changed. If you do take risk out of your portfolio, it should be a strategic long-term allocation plan based on this realisation, not a tactical (timing) choice.
Reminding ourselves that investing is a long-term strategy, as opposed to short-term strategies, like trading, speculating, and gambling helps us avoid devoting too much focus on the present. Over 1, 3, 5+ year periods, stock market returns are generally pretty robust after a bear market (shown in the chart below).
A Recession is Not a Reason to Sell
One of the best predictors of the economy is the stock market itself. Markets tend to fall in advance of recessions and start climbing earlier than the economy does. As the chart below shows, returns have often been positive while the economy was still in a recession.
The green vertical bars show the length of the recession, while the blue line shows the performance of the stock market.
For more info about each of these recessions and bear markets, you go go this link to view an interactive version of the chart above:
https://www.dimensional.com/ca-en/insights/market-returns-through-a-century-of-recessions
Sources:
- Three Crucial Lessons for Weathering the Stock Market’s Storm and a companion visual Market Returns through a Century of Recessions
What I’m Reading
- In the short term, the market is completely unpredictable and volatile. However, you can get a sense of reasonable expected mid-term (7-10 years) returns based on current market conditions and valuations. This article sheds some light on why that is: https://www.morningstar.com/articles/1102371/experts-predict-stock-and-bond-market-returns-bear-market-edition
Disclaimer:
Marc Berger is an IIROC registered investment advisor with Aligned Capital Partners Inc. (ACPI), and as such, you may be dealing with more than one entity depending on the products or services offered. The name of the entity being represented should correspond to the business being conducted. ACPI is regulated by the Investment Industry Regulatory Organization of Canada (IIROC) and a Member of the Canadian Investor Protection Fund (CIPF). Securities are provided by ACPI.
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