It’s a good idea to avoid that (obviously). The proper mindset was captured by Pericles, a Greek statesman from the fifth century BC, who said, “Our job is not to predict the future, but prepare for it.” We don’t know when the next bear market will begin... and our job is not to guess. The current bull run for U.S. equities, which is now the longest in history by various measures, could keep going like the Energizer Bunny for three months... six months... even longer. But sooner or later – and sooner is a real possibility – it will come to an end. And another bear market will come. First Trust, a portfolio wealth manager, did a study of S&P 500 performance dating back to 1926. They divided the S&P 500’s performance into bull and bear market periods, and defined “bear market” as follows: From when the index closes at least 20% down from its previous high close, through the lowest close reached after it has fallen 20% or more. Based on that definition, the S&P 500 has seen eight separate bear markets since 1926. The average bear market length, according to First Trust, was 1.4 years. And the average cumulative loss was 41%. The longest bear market, after the 1929 crash, was 2.8 years. The shortest, after the crash of 1987, was just three months.
WHAT CANWE LEARN FROM THIS DATA? Keep in mind that First Trust measured from the point of 20% decline to the bottoming- out price. In terms of investor psychology, a bear market can feel like it’s longer, because the final bottom can only be determined with hindsight. Many consider the bear to be ongoing for months or even years after a new bull run has started. The 17th century English philosopher Thomas Hobbes once described the life of primitive man as “nasty, brutish, and short.” Fortunately the life of man has improved. But that’s still a good description of bear markets. Equity bear markets can be painful... and bloody... and they come to an end faster than most would expect. We can also see that bear markets are potentially devastating for retirement assets. An average cumulative loss of 41 percent – not just on an individual stock holding, but for one’s entire nest egg – is a very tough pill to swallow. BEAR MARKETS CAN ALSO DEVASTATE MENTAL CAPITAL... Which is just as important as financial capital. An investor’s mental capital represents his or her sense of well-being, emotional resilience, and ability to make wise decisions under pressure.
By Dr. Richard Smith
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American Consequences 47
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