Bull markets and bear markets can be good or bad depending on how you have positioned your investment portfolio.
For most investors, bull markets are preferred because they own an asset class, such as stocks, that benefits when prices are rising. Bull markets are marked by a feeling of optimism and excitement. During a bull market investors are confident that asset prices will continue to rise.
The roaring bull market of the 1990s gave us two records: the highest return, 417%, from trough to peak; and the longest duration, 113 months.
For a limited group of investors, who short assets or bet the prices will fall, bear markets can be profitable. However, for the majority of investors these types of markets are painful.
Historic Bear Markets
Bear markets are filled with pessimism and fear as asset prices continue to fall without any clear bottom in sight.
The worst bear market based on returns that ever occurred was around 1929, where from peak to trough the market lost 86%! That wasn’t the longest bear market though. That occurred around 1937 and lasted 61 months. It’s tough to imagine that there were continuous lower returns in the market for slightly more than five years.
Since 1926 the average bull market return was 158%, while the average bear market loss was 45%.
So if our bull markets are so much better than our bear markets, why do the majority of investors fear the bear so much? This gets into behavioral finance, which we have previously discussed and will continue to talk about in the future.
Loss aversion, first demonstrated by two brilliant professors/researchers, Amos Tversky and Daniel Kahneman, suggests that investors “feel” losses twice as much as they do gains. This results in bad investor behaviors where we make improper decisions with our investments.
When we experience losses after long periods of market gains, many will sell out of their investments completely and not return to the markets until after those markets have gained back the loss and much more.
Bear Market Response and Risk Tolerance
Our most recent bear market began in October 2007, lasted 17 months, and resulted in a 57% loss from peak to trough. How did you handle the bear? Sell, hold, re-balance, buy?
If you sold, when did you get back in? Have you gotten back in yet? The answer to these questions tell a lot about your risk tolerance and investment management ability.
So where do we stand today? Our current bull market has lasted 102 months and returned 272%. How much higher can or will it go? How much longer can or will it last? I have no clue; my crystal ball is as good as yours. What I do know is that there will be another bear market in the future, and then there will be another bull market that follows, and so on and so on.
The only way to be a successful investor is to understand that there will be volatility in markets and to be disciplined in our actions so as to avoid emotional responses from feelings of fear and/or greed that can hurt our investment returns over the long term.
If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.