Why You Shouldn’t Fear Bear MarketsSubmitted by Queen City Capital Management on April 13th, 2017
Bear Markets are Healthy for Long Term Returns
We submit that the only thing about bear markets that should matter to investors is how they prepared and how they react. First, no one should be blind to the idea that bear markets occur. They happen with some regularity. While we can’t really predict when they will occur, we know that they will. And we also know that they will eventually give way to another bull market. In fact, there have been 23 bear markets in the last 100 years, each followed by a bull market.
Here is something investors need to remember. The average duration of a bear market in that 100 year period is 11 months as compared with the average duration of 32 months for bull markets. More importantly, the average decline of the bear markets is 27 percent while the average increase of the bull markets has been 119 percent. Meaning, even with the same number of bear markets as bull markets, the stock market has still advanced more than 100-fold since WWII. The takeaway for investors is that the advances made during bull markets can be seen as permanent, while losses during bear markets are only temporary. With each bull market, the losses of the preceding bear market decline were made up and the gains of the prior bull market were extended. In that perspective, bear markets are nothing more than a temporary interruption of a longer term uptrend.
For long term investors, bear markets are healthy and necessary. Without which there would be no risk premium available in the market from which to generate returns. In essence, it is an efficient market’s way of pricing in the extreme unpredictability of long term returns in the shorter term. Investors with the right preparation proceeding and the patience and discipline during bear markets will be rewarded with higher returns during the bull markets.
There is no need to succumb to the noise and the hype. With history as our guide, investors who have a long term outlook, are patient and have discipline to follow their investment philosophy can not only survive bear markets but gain from them.
Data Sources: QCCM, Advisor Websites. Data as of March 31, 2017.
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