Economist and Nobel Peace Prize co-winner Paul Romer once quipped that “A crisis is a terrible thing to waste.” A crisis in the investment world is called a “bear market” – a fall of 20% or more from the market’s previous high – and could also be fairly said to be a terrible thing to waste.
First, it’s often an excellent opportunity to buy undervalued assets and potentially watch them recover sharply when the bear market finally ends. Second, it can help us to recognize the emotions that it triggers and help us to successfully manage them now and through future market crises.
Learning: Bear markets provide important value to patient, disciplined and long-term investors
2022 has been a very challenging year for investors, bringing with it massive increases in interest rates, real fears of recession and destabilizing global political and supply-chain issues – all of which have affected stock and bond prices. Most global markets are firmly in bear market territory or near to it, testing investors’ tolerance and perseverance.
However, historically, patient investors who remain true to their wealth plan, and stay invested even through challenging periods, have been well rewarded. The following chart demonstrates the payoff to investors for seeing past the pain and to the opportunity:
Source: Compound Capital Advisors. Data is from January 1971 to September 2022. Returns reflect the Wilshire 5000 Index (broadest U.S. equity index) in U.S. dollars, comparing the average forward cumulative returns following the worst 9-month declines (from the table above) to the average cumulative returns during all periods between 1971 and 2022.
Learning #2: An emotional test at times, but markets historically always reward
History has shown us that investing can be volatile at times, testing our perseverance and discipline to stay on track to our plans. In fact, bear markets occur, on average, every seven years, generate an average loss of 35%, and endure two-and-a-half years. But, as the chart here shows, our emotions are often at their lowest – despondency – right at the point that markets turn around, and they often lag the market's rebound.
Managing these responses begins with our awareness of them and being conscious of the way we feel throughout the market cycle. This can help us anticipate responses that would otherwise lead to emotionally driven decisions in a moment of crisis that often result in poor long-term outcomes. Proper portfolio construction and a wealth plan that accurately reflects your goals can also help ease the emotional strain of volatility and bear markets, while helping you see the long-term payoff of remaining invested.
Bear markets: Real-world “stress testing”
If you are concerned that the recent market downturn might lead you to veer off of your investment plan, talk to us today. We can help you manage your emotions and stay on track to your plan, while making sure that your plan and portfolio are right for you – even through the most stressful market conditions.
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