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Bear markets, how concerned should we be?

The S&P, Nasdaq and the Russell 2000 have all entered a bear market in recent weeks. 

If you're scratching your head, wondering "What is a bear market?" or "Should I worry about bear markets?" then the following might help. 

What exactly is a bear market?

Financial markets are measured from peak to trough (top to bottom). When patterns emerge over periods of time, it can be referred to as a 'bull' or 'bear' market. I've spoken about the differences between bull and bear markets before, and where they get their names.

To quickly summarise:

  • Bull markets are when prices are rising – the way a bull thrusts his horns upwards

  • Bear markets are when prices are dropping – the way a bear swipes his paws downwards.

There's no set definition, but most agree that a bear market is when the closing price measures 20% less than the most recent high. Therefore we can say that the Nasdaq has been in a bear market for several weeks now. At the time of writing, it's sitting 25.65% down from its previous high.

On average, stocks lose around 37% of their value in a typical bear market. Contrast this with the bull market, where stocks gain 112% on average, and it can feel like a setback.

So we should be concerned and this time it's different, right? Well, not exactly.

Bear markets are normal

Even the most experienced investor might be a bit worried by what feels like a new set of circumstances. 

Take a deep breath. It's going to be fine. I can’t count the number of times I have now worked though bear markets in a 20 year career. Each time, one strategy beats all others. Hold. 

Is a bear market the same as a recession? Not necessarily. They're often linked, because recessions mean that the economy is slowing down, but there have been periods where a recession has witnessed strong market performance. 

Bear markets happen quite a lot. In fact, there have been a total of 26 bear markets since 1928 in the S&P 500 – and 27 bull markets during the same period. But remember the average loss in 26 bear markets is -37% but those 27 bull markets each average a 112% gain. 

So, bear and bull markets both happen regularly. However, we're more used to bull markets because they tend to last much longer. While the average bear market is just 9.6 months long, the average bull market lingers for 2.7 years. Sometimes even longer: the most recent bull market was over 7 years long.

As well as being shorter, bear markets have become much less common. Since World War II, there have been 14 bear markets – so one every 5.4 years. Before that, bears roamed the financial markets much more boldly. Our grandparents and great-grandparents would have experienced a bear market every 1.4 years.

Change is scary. When you're used to everything rising upwards, it can be jarring to suddenly see things drop. But, when you're in it for the long-haul, encountering these ferocious beasts is just part and parcel of navigating the wilds of the financial markets. If you're going to invest for 50 years, you can expect to see at least 14 bear markets.

I'm not going to sugar coat things. These times can be painful. They can also trigger a fair bit of anxiety. Each bear market will feel different and bring its own unique troubles. But you'll get through it, if you keep a level head.

This too shall pass

My biggest piece of advice for this upcoming bear market? Relax. Remember that every bear market comes to an end. Usually within a year.

If you're watching your portfolio and growing concerned that everything is going sideways – or even backwards – just remember that stocks are positive 78% of the time. Just now, we're in that small, 22% time period where markets decline.

Even when you combine positive and negative periods, including the most recent decline, Navigate 60 has produced an annualised return of 6.05% (after all fees). You might make a loss now, but stand your ground and you'll end up in positive territory. Just give it time. 

Battling bears, bulls and other beasts

Nobody can predict when the bear will come out of hibernation to take a swipe at the stock market. But what we can count on is that the bull will eventually come charging back to re-establish his dominance.

It's all about holding steady and playing the long game. Which is why it's important to have a financial planner to help you stand firm in the face of the fiercest grizzly.

But it's not just about bears and bulls. Financial markets are the natural habitat of a whole menagerie of other creatures. Here are some to look out for:

  • Black swan: a ‘black swan event’ is when something extremely rare and unpredictable happens, with huge consequences. See Fukushima nuclear disaster.

  • Stag: Short-term spectators who buy and sell stocks quickly, not thinking about the long term.

  • Chicken: Nervous investors who peck around with no plan, are spooked by any sort of loss, and let anxiety override common sense.

  • Ostrich: the ‘ostrich effect’ is when investors bury their head in the sand, ignoring falling stock prices and hard financial situations.

  • Dog: ‘dog funds’ underperform, delivering a worse return than the market they’re invested in.

  • Doves and hawks: these birds take flight when central bankers discuss monetary policy. ‘Dovish’ bankers are pessimistic about economic growth, while ‘hawkish’ ones are optimistic.

  • Unicorn: a magical creature of myth, or a privately owned startup valued at more than $1 billion.

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