What is a bear market, anyway? Bulls, bears, recessions, perceptions

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OkieIndexer
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What is a bear market, anyway? Bulls, bears, recessions, perceptions

Post by OkieIndexer » Sat Jan 12, 2019 7:16 pm

https://medium.com/@justusjp/bulls-bear ... bea0f4060d
Bear Markets: arguing about fractions of a percent
What exactly is a bear market anyway? A drop of 20% seems to become the Common Wisdom™. A drop of 15% is just a “correction” and not a “bear”. But what about a drop of 18%? Still not a bear? A drop of 19%? What difference does that extra 1% really affect?
Investor sentiment and the rewriting of history
Let’s step away from technical arguments about exactly what does and does not constitute a bear market.

When stocks drop even 10% investors freak out. When they drop 15% they freak out even more. There were lots and lots and lots of people who were invested in 2016 and 2011. They lived through those 15% drops, 19% drops. They saw their Vanguard Total Stock Market fund drop 17% in 2011. They saw their Vanguard Total International Stock ETF drop 20% in 2014. They saw their Vanguard Small-Cap Value ETF drop 24%. They saw their Vanguard REIT Fund drop 17% in 2011.

Why does the average investor not remember those drops? Don’t they read the headlines about a 9 year bull market and go, “Wait a second, I remember a lot of sleepless nights pretty recently when my portfolio was getting hammered!”

Do we really need to read a news article to tell us how our own portfolios have been doing?
"In bull markets, people say 'The more risk I take, the greater my return.' But when people aren't afraid of risk, they'll accept risk without being compensated." -Howard Marks, Oaktree Capital

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nisiprius
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Re: What is a bear market, anyway? Bulls, bears, recessions, perceptions

Post by nisiprius » Sat Jan 12, 2019 7:56 pm

And while we are on the topic, the period from 1929 through 1945 is commonly tabulated as two bear markets. Ibbotson SBBI 2015 Classic Yearbook tabulates them this way:

Peak August, 1929
Trough May, 1932
Decline, 79%
Recovery, November 1936

Peak Feb, 1937
Trough March, 1938
Decline, 49.93%
Recovery. Feb 1945

Do you see the problem? There is only a three-month gap between them. This is another borderline situation. Now, the S&P Composite was 31.30 in September, 1929 In fact, the "total return index" (including reinvested dividends) is shown in that volume as 2.993 in August, 1929, rising only to 2.506 in February, 1937. Depending on how you measure it, this could be scored either as two seven-or-eight-year bear markets back to back, or as one fifteen-year bear market.

This is particularly important because during bear markets there is often a good deal of cheerful talk about "historically longest bear markets" and bucket strategies often claim that the cash bucket is "big enough to wait out the average bear market."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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