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Understanding Bear Markets Thumbnail

Understanding Bear Markets

We know that days like today in the market are hard to watch.  We acknowledge that 2022 has been a terrible year so far for investors and retirement plan savers.

Even as financial planners, we ourselves are not immune to the negative emotions that we feel when we watch the markets decline 3-5% in one day, and over 20% since the beginning of the year.

Many of you have contacted us via email or phone this week to ask what you should do to stop the losses in your retirement account?  This is a reasonable and rational question.  Thankfully, our extensive training and knowledge of the markets has prepared us well for this very moment.  As your fiduciary advisors, we want to share this very important information and advice with you this afternoon:

Paper vs. Real Losses

During periods of market decline, losses are “unrealized” until you sell an investment for less than you paid for it...and then you “realize” the loss.  Between October 2007 and March 6, 2009, global equities declined an average of 50%.  Millions of retirement plan investors lost real wealth and hard earned retirement savings during this time period because they made the decision to sell their stock funds and convert their “unrealized” (or paper losses) into “realized” losses.  The sad part of this history is that more than half of that wealth was lost by investors who sold securities in the 45 day period before March 7th, 2009, the date on which the greatest bull market in stock market history began.  Their decision to turn “unrealized” losses into “realized losses caused them to miss out on significant gains.

Things we are doing to take advantage of this volatility

  • Instinctually, the overriding emotion that investors are feeling this week is to flee to safety.  However, as we learned in the lesson of the bear market of 2007-2009, this instinct, if acted upon, can be disastrous for our financial futures.  
  • At DecisionPoint, we know that we have no control over the movements of the markets, but we do take advantage of those movements by doing the following in your accounts when appropriate:
  • Rebalancing - Selling what is only down a little this year and buying what is down a lotReviewing your accounts - We are trying to catch those of you who may have moved to cash or bonds in an attempt to time the market.  If this is you, please let us help you properly re-allocate so that don’t hurt your ability to retire in the future.

9 Things we want you to know about Bear Markets

  • Market cycles are measured from peak to trough, so a stock index officially reaches bear territory when the closing price drops at least 20% from its most recent high.  Conversely, a new bull market begins when the closing price gains 20% from its low.
  • Stocks decline an average of 36% in a bear market.  By contrast, stocks gain 114% on average during a bull market.
  • Bear markets are normal.  There have been 26 bear markets in the S&P 500 index since 1928.  However, there have also been 27 bull markets - and stocks have risen significantly over the long term.
  • Bear markets tend to be short-lived.  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.
  • A bear market occurs on average once every 3.6 years.
  • Half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market.  Another 34% of the market’s best days took place in the first two months of a bull market - before it was clear a bull market had begun.  
  • A bear market doesn’t necessarily forecast an economic recession.  There have been 26 bear markets since 1929, but only 15 recessions.  Bear markets often go hand in hand with a slowing economy, but a declining market doesn’t necessarily mean a recession is looming.
  • Assuming a 50-year investment horizon, the average investor can expect approximately 14 bear markets during their investing lifetime.
  • Bear markets can be painful, but overall, markets are positive the majority of the time.  Stocks have averaged about a 10% annualized return since 1928, and no matter the current price point, the future expected return for equities is always positive over the long-term.

Because we fully understand that the investment decisions that you make today will determine if your wealth is lost or created, we will do our best in the days, weeks, months, and years to come, to always keep you in your seats on the market roller coaster ride.  

As always, please reach out if we can be of assistance! 

- Your DecisionPoint Financial Planning Team -