Despite the recent rally in the S&P 500 index, there are still investors who ask me about the current bear market and want to know if we are “out of the woods” or if there is “more pain to come”. Historically, the stronger the rally, the higher the probability that the bear market will end. After a 17.4% rally from the June S&P 500 lows, there is a low probability that this rally will fail. However, if it does fail, the historical average decline from these levels to the ultimate bear market low would be 31% and would take over half a year to play itself out.
it's virtually impossible to determine whether or not a bottom has already been reached. Fortunately for long-term investors, we don't have to know. Long-term stock returns average around 8% per year and include all the bear market declines, rallies, and recessions! Putting current events into a longer-term context helps us focus on what we can control and sticking to the plan is often the most effective and least stressful course of action.
So what IS going on?
- Although you may be tempted to think this bear market will be just as short-lived as the last, history extending back sixty years shows us that all bear markets have their own unique wrinkles. And without fail, the worst period for one asset class is also a boon for another.
- Don't be fooled by randomness and confirmation bias. Many people, even experts, see information and patterns and believe they have some profound insight, but most of what lies ahead is uncertain and random.
- What makes a good or bad market is rarely obvious, and certainly not in retrospect. Every single bear market has at least one Monday Morning Quarterback that knows what play would have succeeded. And very few people are right about either the down or the up-side of a bear market.
So what CAN we do?
- Don't let emotions drive your investment decisions. Remember your investment time horizon, and develop realistic expectations by accepting that both positive and negative returns will inevitably occur.
- Build an equity portfolio that's resilient in a variety of market conditions and is designed to work for you. Have a disciplined, data-driven, and rules-based investment process designed to drive out emotional decisions.
- Let's be honest. You're busy with a full-time job, hitting the gym in the evenings, and still making time for your friends and family. You want to invest, but it's just not a priority in your life right now. That's why you should work with an experienced financial advisor who has been through different market environments and can help you avoid emotional short-term decisions that can impact your long-term success.
- Evaluating your risk tolerance can help you to choose the right investment strategies for your needs and be the best tool to help you prevent the bear market rollercoaster.
W. Tom Polowy, MS
Financial Advisor, Registered Representative
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. No investment strategy can guarantee a profit or protect against loss.