What really happens in a bear market?

[abhinav23]

I am a new 37 year old investor and understand the strategy of waiting it out when the bear market hits. However I am not sure how much we can recover after a bear market? Suppose I'm invested in a 2045 retirement fund? In 2025 there is a bear run and my portfolio (let's say it is 65 stock-35 bonds based on my age at that time) drops by 30%. Ho much can I make up in the next twenty years with that proportion of stocks and bonds.

[bigred77]

No guarantees but usually all of it and then some. Usually a lot more.

[RRAAYY3]

invest consistently ... invest more during bears ... increase bond ratio/allocation as you near retirement ...

at 32 I'm hoping for a bear soon ... so I can buy even more

[MittensMoney]

There are two parts to this. Number one, don't sell your assets, they will recover eventually. Number two, continue to put money into the market as you normally would, those assets will be bought at lower prices and thus gain more as the market recovers. If you do both of those things then the bear market won't be the worst thing in the world, however if you pull your money out and don't invest anything you will truly screw yourself over waiting on the sidelines.

[delamer]

There is no one answer to your question, based on historical patterns and even assuming that history repeats (which may not be true).

http://awealthofcommonsense.com/2014/02 ... ket-timer/

[bertilak]

I am a new 37 year old investor and understand the strategy of waiting it out when the bear market hits. However I am not sure how much we can recover after a bear market? Suppose I'm invested in a 2045 retirement fund? In 2025 there is a bear run and my portfolio (let's say it is 65 stock-35 bonds based on my age at that time) drops by 30%. Ho much can I make up in the next twenty years with that proportion of stocks and bonds.

It is said that in a bear market stocks are transferred to their rightful owners.

[nedsaid]

I am a new 37 year old investor and understand the strategy of waiting it out when the bear market hits. However I am not sure how much we can recover after a bear market? Suppose I'm invested in a 2045 retirement fund? In 2025 there is a bear run and my portfolio (let's say it is 65 stock-35 bonds based on my age at that time) drops by 30%. Ho much can I make up in the next twenty years with that proportion of stocks and bonds.

Historically, the US Stock Market has always recovered. I wouldn't worry about bear markets until you get into your fifties.

Pretty much what happens in bear markets is this: stocks go down in price a lot and you wonder why the heck you got involved in this in the first place. Bear markets are where you make your money as an investor as it gives you a rare opportunity to buy stocks at bargain prices with new monies for investment. The worst you can do is sell at the bottom, that is a mistake from which you won't recover particularly if you wait for the market to go up a lot before going back in. It is time IN the market and not the timing OF the market that makes you money.

[David Jay]

Let's consider the biggest drop in the last 30 years: From a high in the 3rd quarter of 2007, the drop in the S&P 500 (a reasonable proxy for "the market) was over 50%. It had fully recovered by the first quarter of 2012, so it was 3 years from the bottom to full recovery.

If you had a portfolio that was 65% stocks, the drop would have been closer to 35% with a recovery over the same period (perhaps a bit sooner due to minor growth in your bond allocation).

[bigred77]

There is no one answer to your question, based on historical patterns and even assuming that history repeats (which may not be true).

http://awealthofcommonsense.com/2014/02 ... ket-timer/

I hadn't seen that in a while but that is an excellent article.

[whodidntante]

Bear market? You mean buying opportunity?

[RRAAYY3]

Bear market? You mean buying opportunity?

my only regret was not buying more during that random Wednesday "freefall" last month ... I bought, just thought it'd continue dropping a bit more ...

maybe this Thursday we get another chance ...

[delamer]

There is no one answer to your question, based on historical patterns and even assuming that history repeats (which may not be true).

http://awealthofcommonsense.com/2014/02 ... ket-timer/

I hadn't seen that in a while but that is an excellent article.

Yes, pretty stunning. I certainly wouldn't have guessed the end result.

[Boglebum]

There are two parts to this. Number one, don't sell your assets, they will recover eventually. Number two, continue to put money into the market as you normally would, those assets will be bought at lower prices and thus gain more as the market recovers. If you do both of those things then the bear market won't be the worst thing in the world, however if you pull your money out and don't invest anything you will truly screw yourself over waiting on the sidelines.

I interpreted the OP's question as being specific to the Target Retirement funds, which effectively force you to sell equities as you get closer to the target date.

Using their example, if you have a $1M in a 65/35 allocation and the stock market drops 30%, you would then have $805K in a 57/43 allocation. Presumably the fund re-balances back to 65/35, selling bonds to buy more stocks at their new lower price (in reality, it likely did this in steps on the way down). This would be true of any balanced fund, not just a Target Retirement fund.

The twist is that, with a Target Retirement fund, it is possible that the fund switches to a more conservative allocation before the stock market recovers, causing you to sell some of your equities at their lower price and buy more bonds. Continuing the example, that $805K in 65/35 allocation could be switched to a 55/45 allocation during the recession, causing you to sell ~12K worth of equities "at the bottom", locking in losses.

I don't know how realistic that scenario is since it depends on a quick drop in the stock market shortly before the Target Retirement fund's pre-scheduled allocation adjustment. But I believe that is the risk the OP was concerned about. As for how much longer it will take to recover those ~12k (1.2%) losses after the bear market, it will depend on the relative market returns of stocks and bonds -- which no one can predict.

Why not focus on the opposite -- but similarly unlikely scenario -- that there is a bull market where stocks rise 30% and your Target Retirement fund switches to a more conservative allocation before it drops? In that case, you locked in the extra gains. With a long enough investment horizon, you'll probably get a little bit of both scenarios and you can call it a wash.

[Pobre]

I just read this article today, and I believe it's relevant to the thread subject:

Could This Be Why the Middle Class Is Disappearing?

[celia]

I can almost guarantee there will be several bear markets between now and 2045.

But there will also be several bull markets.

Over the history of the stock markets, the bulls have a bigger impact than the bears, else why would anyone invest.

[ray333]

People are scared of investing. It took forever to convince my girlfriend (making 6 figures and paid off student loans) to "invest" @ 32 ... with a target retirement fund

I think it's a combo of 08/09 and people simply not understanding the market so they avoid all together

Or the cost of living is way out of wack with wage growth and people simply can't afford to invest "extra money". My dads friend loves to brag about how he was married and bought a house @ 25 ... I told him that's almost impossible in this day and age - in north jersey anyway

[Valuethinker]

I just read this article today, and I believe it's relevant to the thread subject:

Could This Be Why the Middle Class Is Disappearing?

I think it is reversing cause and effect.

[Dottie57]

I am a new 37 year old investor and understand the strategy of waiting it out when the bear market hits. However I am not sure how much we can recover after a bear market? Suppose I'm invested in a 2045 retirement fund? In 2025 there is a bear run and my portfolio (let's say it is 65 stock-35 bonds based on my age at that time) drops by 30%. Ho much can I make up in the next twenty years with that proportion of stocks and bonds.

I lost in 2008. About 30-40% of stocks and 8% of bonds. I literally could not sleep at night.

I kept contributing and upped my stock allocation a nit. As I am 60 I am putting 24k intp 401k.

Right now I have 2.5 to 3 times what I had in 2008 beginning of.

[arcticpineapplecorp.]

The stock market is the only market that I know of that when the store goes on sale everybody runs for the exits.

This is an old picture (I think I stole it from one of Nisiprius' post) but can be helpful. Not all bear markets take a really long time to recover, but you should be prepared just in case and plan accordingly.



This was from one of Larry Swedroe's books. It shows what stock/bond allocations lost in the bear market of 73-74. Again, be prepared and choose an allocation that will allow you to stay the course.



This might also be helpful:

http://traderhq.com/illustrated-history ... ar-market/

And then there's this which visually makes the point:

http://www.crsp.com/files/investments_i ... veries.pdf



What do you notice? The bulls have run much longer than the bears. Hang in there. Investing is a marathon, not a sprint.

[SJR]

The stock market is the only market that I know of that when the store goes on sale everybody runs for the exits.

This line is great. Where'd you find it?

[arcticpineapplecorp.]

The stock market is the only market that I know of that when the store goes on sale everybody runs for the exits.

This line is great. Where'd you find it?

I've heard it many times most likely from others who were also repeating it. In fairness, before I posted I looked up that phrase in google to see if there was a citation but found none. If anyone knows, please share.

It's sorta like the Warren Buffett quote (paraphrasing) about if you are a buyer of hamburgers over the next thirty years do you want the price of beef to go up or down? Everyone says down of course because that's what "consumers" want--low prices. So if you're buying shares over the next 30 years do you want share prices to go up or down? Ummm....well, hey now wait a minute!! No, there's really only one answer. Down. If you're buying shares you want prices to fall so you can buy more shares at lower prices. If you're selling shares (in retirement) you want prices to rise. That's it. That simple.

But instead of focusing on the low prices that are available in a bear market, they instead look at the "value of their account" and start to make erroneous assumptions, mostly that they've "lost money". Nothing could be further than the truth. Truth is, there's no money in an investment account. Only shares. Don't believe me? Take a look at your statement and see what it says under "value of account". It says "total number of shares owned" and "Current price per share" (which when the two are multiplied equals the "value of the account"). What do you own? Shares. Not money? Nope, just shares.

And you don't lose any shares because of a bear market. You have the same number of shares. The value of the shares declines, but that's all. Markets decline. Markets increase. Wealth flows to owners. If you're selling shares, you're no longer an owner.

[Taylor Larimore]

abhinav23:

Welcome to the Bogleheads Forum!

You ask: "What really happens in a bear market?"

I have endured ten awful bear markets. This was my first:

Our family owned "Larimore's Diner" in Foxboro, Mass. in 1929 (I was 5 years old at that time). When the depression hit, we lost the Diner and moved into my grandfather's home in Miami. Grandfather, who was a millionaire investor and chief executive of an investment trust company, lost everything--including the Miami home we lived in.

BEAR MARKET OF 1929-1937 (Dow plunged 89%)
-1929--1930--1931--1932
(-31%)(-25%)(-43%)(-08%) Large Cap Stocks
(-34%)(-35%)(-47%)(-06%) Mid/Small Cap Stocks
(-47%)(-38%)(-50%)(-05%) Micro Cap Stocks

(+04%)(+07%)(-02%)(+09%) 5-Year Treasury Bonds

BEAR MARKET OF 1973-1976 (S&P fell 43%)
-1973--1974
(-15%)(-26%) Large Caps
(-39%)(-29%) Micro Caps

---(-70%) Coca-Cola
---(-82%) Intel
---(-73%) McDonald's
---(-86%) Merrill Lynch
---(-86%) Walt Disney
---(-71%) Xerox

Figures cannot convey the horrifying and debilitating effects of a bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom talk is everywhere. Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable. Suicides increase.

That's what a bear market is like.

Best wishes.
Taylor

[abhinav23]

Very useful. Thank you for the input. Taylor, thank you for the sobering post at the end. With your experience above what would you advise others? What percentage of the annual income should be invested? I was thinking that I should keep investing about 20% every year. I save a lot- probably around 50 percent of my income. Pre tax annual income (together with my wife's) is about 360k and will increase to about 600k in two years.

abhinav23:

Welcome to the Bogleheads Forum!

You ask: "What really happens in a bear market?"

I have endured ten awful bear markets. This was my first:

Our family owned "Larimore's Diner" in Foxboro, Mass. in 1929 (I was 5 years old at that time). When the depression hit, we lost the Diner and moved into my grandfather's home in Miami. Grandfather, who was a millionaire investor and chief executive of an investment trust company, lost everything--including the Miami home we lived in.

BEAR MARKET OF 1929-1937 (Dow plunged 89%)
-1929--1930--1931--1932
(-31%)(-25%)(-43%)(-08%) Large Cap Stocks
(-34%)(-35%)(-47%)(-06%) Mid/Small Cap Stocks
(-47%)(-38%)(-50%)(-05%) Micro Cap Stocks

(+04%)(+07%)(-02%)(+09%) 5-Year Treasury Bonds

BEAR MARKET OF 1973-1976 (S&P fell 43%)
-1973--1974
(-15%)(-26%) Large Caps
(-39%)(-29%) Micro Caps

---(-70%) Coca-Cola
---(-82%) Intel
---(-73%) McDonald's
---(-86%) Merrill Lynch
---(-86%) Walt Disney
---(-71%) Xerox

Figures cannot convey the horrifying and debilitating effects of a bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom talk is everywhere. Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable. Suicides increase.

That's what a bear market is like.

Best wishes.
Taylor

[fundseeker]

There is no one answer to your question, based on historical patterns and even assuming that history repeats (which may not be true).

http://awealthofcommonsense.com/2014/02 ... ket-timer/

Good article, but what I noticed was,

"And if he [Bob] would have simply dollar cost averaged into the market on an annual basis with his savings he would have ended up with much more money in the end (over $2.3 million)."

This seems to support DCAing, contrary to the lump sum approach most of the members of this forum promote.

[KarenC]

People are scared of investing. It took forever to convince my girlfriend (making 6 figures and paid off student loans) to "invest" @ 32 ... with a target retirement fund

Why the scare quotes? A target retirement fund is a legitimate investment.

[rkhusky]

Taylor's post contains excellent examples of the risk of stocks. I would add that 2008 was similar. It looked like the entire financial industry was going down the drain. But the government stepped in and helped some companies out. What would've happened if they hadn't done that? No one knows. What happens if they don't help out during the next crash? Keep in mind that the market is not guaranteed to return after a drop. That's why it's called risk. If the market was guaranteed to return to normal levels soon after a crash, there wouldn't be as much risk and the market premium would drop.

[nisiprius]

With the always-necessary proviso that we don't know "what happens" (i.e. what always happens or what is likely to happen in a future bear market) we can ask "what did happen" in the past. It can't be overemphasized that the stock market is capricious; as in the Olympics it is constantly making new records and doing new things, good and bad, that have never happened before... and making swings that are so wide that they can have a noticeable impact on averages over periods of many decades.

You said "65% stocks, 35% bonds" and that's reasonably close to the allocations of several funds which I'm including in a chart. These Morningstar charts do not correct for inflation, but they are total return charts that include reinvested dividends, which is fairly important. These are perhaps closer to 60/40 than 65/35. The funds include a variety of mainstream strategies; some have international, some not, some are index funds, some active. It doesn't matter much in the big picture. Please focus on the similarities, not the detailed differences, I'm not trying to show or decide what's "best."

Respectively: Vanguard Balanced Index Fund, VBINX;
Fidelity Asset Manager 60%, FSANX, orange;
Vanguard LifeStrategy Moderate Growth, VSMGX, green;
Vanguard Wellington Fund, VWELX, yellow (hard to see).
Source


Notice that:
1) They dropped by amounts ranging from 34% to 39%. All in the same ballpark. And, by the way, there isn't any magic, you can mostly ignore the stuff you read about various stock categories giving you "downside protection in a bear market," even when there's a grain of truth in it is still still a relatively small effect. The only really effective way to protect yourself against a stock market crash is to invest less of your portfolio in stocks, which of course then means you get less of the hoped-for long-term returns.

As common sense suggests, if the stock market drops 50% and you are holding 60% stocks, your portfolio drops about 50% of 60% = 30%.

2) All of them were back to even, above $10,000, by early 2011.

3) However, you can't count on that fast a recovery. They all recovered quickly because the stock market recovered quickly. That was by no means certain and in 2009 people were debating on whether we would see "V-shaped recovery" (as we did) or an "L-shaped recovery" (long, slow, and agonizing).

4) When we were in it, my wife and I were terrified despite having a conservative asset allocation. We didn't sell (but I couldn't bear to rebalance) and I've described it as more like "deer caught in the headlights" than "staying the course." We really did have discussions from time to time and we kept agreeing, "just... do... nothing. We might as well stick it out, anything we can do might make things worse, let's not dodge into a bullet." The two years or so it took for recovery seems like nothing now, but when it was happening it seemed like a very long time indeed, and when we were "back to even" it didn't feel all that great or all that OK. And while memories have blurred and there's an impression that it's been all up since 2009, there was actually a very nasty 20% correction in late 2011 that gave a lot of people at least a mild case of the jitters. You have got to be realistic about your personal risk tolerance and not get overconfident about your ability to stay the course during a crash.

[Valuethinker]

abhinav23:

Welcome to the Bogleheads Forum!

You ask: "What really happens in a bear market?"

I have endured ten awful bear markets. This was my first:

Our family owned "Larimore's Diner" in Foxboro, Mass. in 1929 (I was 5 years old at that time). When the depression hit, we lost the Diner and moved into my grandfather's home in Miami. Grandfather, who was a millionaire investor and chief executive of an investment trust company, lost everything--including the Miami home we lived in.

BEAR MARKET OF 1929-1937 (Dow plunged 89%)
-1929--1930--1931--1932
(-31%)(-25%)(-43%)(-08%) Large Cap Stocks
(-34%)(-35%)(-47%)(-06%) Mid/Small Cap Stocks
(-47%)(-38%)(-50%)(-05%) Micro Cap Stocks

(+04%)(+07%)(-02%)(+09%) 5-Year Treasury Bonds

BEAR MARKET OF 1973-1976 (S&P fell 43%)
-1973--1974
(-15%)(-26%) Large Caps
(-39%)(-29%) Micro Caps

---(-70%) Coca-Cola
---(-82%) Intel
---(-73%) McDonald's
---(-86%) Merrill Lynch
---(-86%) Walt Disney
---(-71%) Xerox

Figures cannot convey the horrifying and debilitating effects of a bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom talk is everywhere. Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable. Suicides increase.

That's what a bear market is like.

Best wishes.
Taylor

Taylor

Thank you for this, as ever.

Try as we might we cannot convince people here that stocks are *risky*. It just does not process. They see recent performance (trebling since market bottom in 2009) and conclude stocks always go up.

[mortfree]

There is no one answer to your question, based on historical patterns and even assuming that history repeats (which may not be true).

http://awealthofcommonsense.com/2014/02 ... ket-timer/

Good article, but what I noticed was,

"And if he [Bob] would have simply dollar cost averaged into the market on an annual basis with his savings he would have ended up with much more money in the end (over $2.3 million)."

This seems to support DCAing, contrary to the lump sum approach most of the members of this forum promote.

There are many ways to DCA.

Over a 30-year investing period, someone can contribute on January 3 of each year and that would be DCA on a yearly basis.

In my 401k, I DCA every two weeks; before it was once a month.

In my taxable, I DCA when I have the cash to invest.

Lump Sums are more for when people are sitting on cash, receive a windfall, etc. Then the forum shouts "Lump Sum"

[Valuethinker]

Taylor's post contains excellent examples of the risk of stocks. I would add that 2008 was similar. It looked like the entire financial industry was going down the drain. But the government stepped in and helped some companies out. What would've happened if they hadn't done that? No one knows. What happens if they don't help out during the next crash? Keep in mind that the market is not guaranteed to return after a drop. That's why it's called risk. If the market was guaranteed to return to normal levels soon after a crash, there wouldn't be as much risk and the market premium would drop.

To be clear it was the systemic risks of financial failure of major banks etc. that triggered the bailout. RBS, HBOS/Lloyds, European financial institutions, Ireland etc.

It *is* true that the US government chose to bail out GM & Chrysler. The former because it was the largest industrial employer in the US (I think) and because of the impact on confidence in the whole economy if it went down. The latter, apparently, because of the impact of its default on part suppliers who also supply Ford & GM.

Although credit was advanced through various bailout programmes to companies throughout the world economy, primarily it was to the financial services sector because of its role as an intermediary to move savings to borrowers. That savings & lending mechanism is essential to the health of the world economy.

But generally the worry was that if major banks weren't there tomorrow, then businesses couldn't get loans, there would be a collapse of confidence in the money markets etc. Also in the case of AIG it was the leading provider of Directors & Officers insurance, without which most company Boards literally cannot function.

[harvestbook]

There have been no 15-year losing periods for stocks...yet.

[Taylor Larimore]

What percentage of the annual income should be invested? I was thinking that I should keep investing about 20% every year. I save a lot- probably around 50 percent of my income. Pre tax annual income (together with my wife's) is about 360k and will increase to about 600k in two years.

abhinav23:


I am reluctant to answer your question with the information you provided. Not many Bogleheads' expect to earn over half-a-million dollars annually. If you save 50% and only invest 20% I wonder what you do with the other 30%?

I suggest you start a new topic with more information and we'll see what other Bogleheads have to say.

Best wishes.
Taylor

[nisiprius]

There have been no 15-year losing periods for stocks...yet.

First, you should quality that by saying "for U.S. stocks."

Second, a nit-pick but a medium-sized nit: in real terms, inflation-corrected, stocks lost purchasing power over the fifteen-year period 1965-1979 inclusive, an average (CAGR) of -0.58% per year or about an 8% cumulative loss over the whole period. A razor-thin loss, and of course bonds suffered worse.

[Earl Lemongrab]

It's sorta like the Warren Buffett quote (paraphrasing) about if you are a buyer of hamburgers over the next thirty years do you want the price of beef to go up or down? Everyone says down of course because that's what "consumers" want--low prices. So if you're buying shares over the next 30 years do you want share prices to go up or down? Ummm....well, hey now wait a minute!! No, there's really only one answer. Down. If you're buying shares you want prices to fall so you can buy more shares at lower prices. If you're selling shares (in retirement) you want prices to rise. That's it. That simple.

I think these are terrible analogies. You just can't compare consumables with investments. If I'm a buyer of hamburgers, I want the price to go down and down and never go up. That's because I'm not accumulating those hamburgers hoping to sell them for a profit in the future. I'm using them up and need replacements. Same for items at the department store. I don't care the prices are always cheaper.

If the price of stocks go down, you need to hope that they get back up before you need to sell them.

[delamer]

There is no one answer to your question, based on historical patterns and even assuming that history repeats (which may not be true).

http://awealthofcommonsense.com/2014/02 ... ket-timer/

Good article, but what I noticed was,

"And if he [Bob] would have simply dollar cost averaged into the market on an annual basis with his savings he would have ended up with much more money in the end (over $2.3 million)."

This seems to support DCAing, contrary to the lump sum approach most of the members of this forum promote.

There are many ways to DCA.

Over a 30-year investing period, someone can contribute on January 3 of each year and that would be DCA on a yearly basis.

In my 401k, I DCA every two weeks; before it was once a month.

In my taxable, I DCA when I have the cash to invest.

Lump Sums are more for when people are sitting on cash, receive a windfall, etc. Then the forum shouts "Lump Sum"

Agreed. Bob could have been DCAing, but chose to lump sum -- with really bad timing, but at least he stayed in stocks once he got in.

The problem that posters here have is that they are sitting on a lump sum because they are afraid. And they are particularly afraid of investing at a market high and then having the market go south. But Bob shows that it will work out OK, in the long run, as long as they stay in the market regardless of when they invest.

[goblue100]

Good article, but what I noticed was,

"And if he [Bob] would have simply dollar cost averaged into the market on an annual basis with his savings he would have ended up with much more money in the end (over $2.3 million)."

This seems to support DCAing, contrary to the lump sum approach most of the members of this forum promote.

No. If he had the full amount of money available at the beginning of the time period and invested it he would be light years ahead of DCA. DCA beats waiting many years and then investing at the market top.

[mcraepat9]

I would recommend reading the oft-cited "sheepdog" thread on this forum. It was gut-wrenching, but incredibly enlightening to me, as someone who began investing basically at the bottom in early 2009 (so I did not experience the steep drop).

[Easy Rhino]

Yes, i think it's important to recognize the "everyone around you (who talks about investments) is panicking" effect.