Bear Markets Part 2: Don't Be Surprised By Them!
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Key Facts About Bear Markets
- Bear markets are a natural part of the market cycle - as the market goes up, invariably it will also come down, albeit temporarily.
- Bear markets are common – on average about once every 5 years since 1946.
- Bear markets are temporary – they last anywhere from 2 to 36 months before the long term uptrend of the market takes over again.
A. Bear Markets are Natural
The market has been on a relentless rise over the past 100 years, interrupted periodically by sessions of falling prices known as bear markets. As discussed previously, these periods of price declines occur once prices are driven up beyond reasonable expectations during a bull market. Selling must occur to bring price valuations back down to more “reasonable” levels before they can resume their upward march.
However, as predictable as this storyline is, the timing of it is not. We cannot know with any consistent accuracy the start and end of a bear or bull market. This is why the best strategy is to stay invested regardless of what the market is doing because the long term trend has always been up.
B. Bear Markets are Common
These unpleasant but perfectly natural periods in the market happen quite regularly. As mentioned in our previous article, there have been 13 bear markets from 1946 to 2009, occurring on average about once every 5 years or so. Knowing this should help us anticipate or come to expect them from time to time. We should not be surprised when the market goes down after years of going up because history tells us this is what will happen. Moreover, we can be comforted by the fact that whatever was lost during a bear market has generally been fully recovered and more, further down the road.
C. Bear Markets are Temporary
Another comforting fact is that bear markets are relatively short-lived compared to bull markets. Since 1946, their duration has been anywhere from 2 to 36 months, whereas bull markets lasted between 1.5 to 9 years. We believe in Nick Murray’s often used phrase when he speaks about the stock market: “The advance is permanent and the declines are temporary.” This gives us more reason for staying invested during bear markets as we do not want to be caught out of the market when a bull market returns.
As the market goes up, history tells us it will also go down, on average about once every 5 years since 1946. However, bear markets are relatively short in comparison with the rest of the market cycle. This fact should help us cope with these temporary incidents of price retraction, where the market has shown time and time again that it will recoup all the losses and go on to make new highs.
Given that bear markets are a periodic, temporary part of the market cycle, we should come to expect them and not be overly concerned about what happens to our portfolios during that time. If our long term goals have not changed, then we would not need to make any portfolio changes during a bear market. Of course, this may be easier said than done, since our behaviour is strongly influenced by our emotions. In the next article we will talk about the 3 attitudinal principles we need to adopt in managing our emotions during a bear market.
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This article was prepared solely by Chad Ekren who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). The views and opinions, including any recommendations, expressed in this article are those of Chad Ekren alone and not those of HollisWealth®. Capital Concepts and Capital Concepts Group are personal trade names of Chad Ekren. HollisWealth® is a trade name of Investia Financial Services Inc.