What are bear markets and how long do they last?

Category: Investment

We tell our clients that investing is risky. However, it is during bear markets that this becomes real.

Like most fears, the best way to deal with them is to understand them, know your options, and be confident that they will pass.

What is a bear market?

A bear market occurs when the value of an investable market, an example of which would be the FTSE 100, falls more than 20%. History tells us that bear markets can go much further than 20%. The UK’s worst bear market in the past century was when the UK equity market fell by 73% in the stock market crash of 1972-74.

Are bear markets normal?

Bear markets are, in fact, common.

Data from Vanguard shows that the UK stock market was in bear territory for over 11 years, or 15% of the time, between 1945 and 2021.

Unfortunately, markets falling from time to time is part of the journey when you pursue high returns from equities. If equities were not volatile, more people would invest in them, and the returns they offer would decrease.

What if you look at the global equity market?

Vanguard analysis looked at the frequency of bear markets from 1980-2020 across global equity markets and found they happened 13% of the time.

Global bear markets may even disappear from the record altogether when viewed from the vantage point of the UK, as opposed to the US.

According to Vanguard, US investors have experienced nine global bear markets since 1980, but four vanished when Vanguard looked at the same data in pounds. The fact that the pound tends to fall during a crisis while the dollar goes up partly explains this difference. In this scenario, currency risk works for you. And it’s one reason why UK investors may be better off not currency hedging their equities.

Does a bear market mean there will be a recession?

Not necessarily.

According to fund manager Invesco, only eight of 17 S&P 500 bear markets from 1927 through 2021 coincided with a recession. Looking at this the other way, data from Vanguard states that a bear market occurred in only three of the last 14 US recessions. Even more striking is that during seven of them, investors received positive equity returns accompanied seven of them.

How long do bear markets last?

According to Global Financial Data, between 1900 and 2019, the average global equity bear market lasted 30.2 months. The shortest bear market was three months (1987’s Black Monday), and the longest was eight years and 11 months (World War One plus its prelude and aftermath). If we remove those two extremes, the average bear market lasted 25 months.

How should I invest during a bear market?

The critical thing to do is to stay invested. You don’t need fancy market timing moves; you need resilience, patience, and belief. Too many speculators sell everything, crystallise their losses, and risk missing out on the recovery.

You can buy the same equity markets for less money when stock prices fall, and that, in turn, suggests better times lie ahead. It’s far from guaranteed, but there is a relationship between undervalued markets and future returns, which is one reason stock prices tend to bounce back so strongly. Just as overbuying and euphoria cause bear markets, overselling and depression sow the seeds of recovery.

Investing more during a bear market can shorten the recovery time. We all know buying equities when they are on sale is good, but it’s much easier to say than do. Automating the process with a regular monthly contribution enables you to buy the dips without needing any input from you. Those cheap shares ultimately reward you with tidy profits as prices rebound.

Adopting threshold rebalancing instead of annual rebalancing is another sound move. At its simplest, you’ll trade asset classes that have drifted 10-20% off from your pre-set allocations. It’s a classic ‘sell high, buy low’ technique that requires you to ship out some of your best performers and scoop up armfuls of the stuff nobody wants. This can be tough for some to do, and if you are trying to do this yourself, it may cause you to look at your portfolio more than you might be comfortable with when prices are falling.

Do you need help with your strategy? To find out more about how we can help, feel free to book a free no-obligation chat here.



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