We are officially in a bear market. But what shall investors do next? It would be a good idea to look at the bear markets of the past and then decide.
According to Yardeni Research, there have been 21 bear markets going back to the 1920s. The average bear market lasted about 300 days, so about 10 months. That’s not too bad, but only half of the truth. The recovery generally takes longer. According to Ned Davis Research, over the last 100 years, the U.S. market has taken an average of 3.1 years to battle back to the previous peak.
Of course, this is just an average. Bear markets vary and differ a lot. We experienced the fastest bear market in history not long ago in 2020. The S&P 500 reached a record high on February 19, 2020, and fell to a bottom on March 23, lasting just 33 days. And by end of August, just 5 months later, the S&P had surpassed its previous high. However, the longest bear market took much longer to recover. It began in 1973. Stocks did not recover for almost 12 years. No other market downturn in the last century took so long to surpass its previous high.
The current bear market has already lasted longer than the one in 2020. No one knows how long it will continue. However, in downturns the best investors put fresh money to work in great companies at better prices. The second-best investors sit on their hands but at least remain invested and reinvest their dividends if they don’t need the income. While the worst investors panic and sell.
To do the right thing in such situations you need the proper perspective. If you invested to meet long-term goals, don’t let short-term events derail your plans. Do not get too fussed about the day-to-day swings in the stock market. While checking your account value a few times a day in good times and feeling good to make money and to see your net worth grow, there is little point of making yourself miserable by looking at a falling account value in a down market every day.
It is nearly impossible not to feel emotional about the stock market from time to time. But feeling emotional is one thing. Acting on it is another. Fear, anxiety and regret do not generally lead to good investment decisions.
When stocks drop, look at them with an opportunity mindset. Realize, that every bear market of the last 200 years was a buying opportunity. Add to your portfolio when stocks are on sale. At least, stay invested and reinvest your dividends during these difficult times.
Sven Franssen