Bears Aren't So Bad

Bear markets seem scary, but they’re not as bad for older investors as we’ve been led to believe.

Most responsible investment advisors say that most diversified equity investors should wait out a bear market because, if history is a decent guide, they will eventually be fine.

However, that advice is often followed by a "However..."

"...if you’re close to retirement you may not have enough time to recover."

So, how long have bear markets actually lasted in the past? You may have heard horror stories, from people selling annuities, about the duration of stock losses back in the 1930s or post 2008. But the reality is far different from the hyperbole.

Mark Hulbert from Marketwatch recently crunched the numbers for US equities since 1900 and found that it hasn’t taken as long as many believed to recover from bear markets in the past.

He looked back at the 36 bear markets since 1900 (118 years) taking into account both dividends and inflation to determine how long it took the stock market to recover back to its pre-bear market high.

He was shocked to discover that the average recovery time for those three dozen bear markets was just 3.2 years. And, bear in mind, that was the average.

When he calculated the median recovery time (that is the number halfway between the longest recovery and the shortest) it was a hair less than two years.

Yes, but what about that nasty worst case historic scenario? Not anywhere near the horrible terms bandied about by desperate salespeople who neglect to add in dividends. Even after adjusting for the negative effects of inflation, the longest time a past investor would have ever had to wait to get back to the previous market was 5.4 years. Most of you have already survived the worst, as that worst case recovery was from October of 2007 to March of 2013.

 Of course, the future may be very different. We cannot possibly predict the future. If you have more than 5 years before you need your investments, there’s a very good chance you’ll be fine. Particularly if your portfolio is properly balanced between stocks and bonds.

That 5.4 year recovery period was for a portfolio of 100% US stocks. A properly balanced portfolio would have recovered faster.