Why it makes sense to keep investing during a “garden strain” bear market

This year is currently shaping up to be one of the toughest ever for the stock market.

In the first nine months of 2022, the S&P 500 index lost 23.9%. Only five full calendar years produced poorer returns: three years after the Great Depression, 2008 and 1974.

But while market history paints a dire picture of what’s happened so far this year, it also offers a silver lining for long-term investors. Bear markets like the current one tend to be short, and investors who keep their cool tend to pull through.

That’s what Charles Rotblut, vice president of the American Association of Individual Investors, pointed out in a recent tweet. “Not only is the current bear market well within the typical range of past bears, but those who stick to their allocations are being rewarded for it,” he wrote.

The data he refers to comes from CFRA chief investment strategist Sam Stovall, who analyzed 13 bear markets — defined as a decline of 20% or more from market highs — dating back to 1945.

The current bear falls under what Stovall calls “garden variety” bear markets – those that feature a stock market decline of between 20% and 40%. The others he calls “mega-meltdown” bears, which saw declines of more than 40%.

This last type is particularly difficult for investors, lasting just under two years on average, with an average drop of 51%.

The garden bear is a little less intimidating. The average drawdown during these periods is 27%, and they tend to last 13 months on average. And especially for investors, it only took 27 months for stocks to get back to their highs after those periods of decline, on average. That compares to an average recovery time of nearly five years for the toughest bears.

Two years might seem like a long time to stare at red numbers in your wallet, and five years might seem like an eternity. But if you’ve been invested for decades, a period of a few years is a dud.

More importantly, it would be wise to add to your portfolio during bear markets, rather than sell, says Rotblut.

“Have you ever looked at the chart and thought, ‘I wish I had bought this stock when it was down at this price? So why don’t you buy now?” he says. “Nobody knows where the bottom is, but we know the stock is selling right now.”

The bottom of the market may well be in the future, and selling now before things get worse could, in the long run, boost your returns. But that would most likely be a mistake, experts say, for two reasons.

One: Even if you are right that the market continues to fall, selling now would require you to time the right time to come back in order to make a profit. “If you’re going to cash out, what’s your rule for getting back into the market? What are you going to use as a marker? And what if you don’t act then?” Rotblut said.

Timing the market is extremely difficult, and getting it wrong could cripple your returns. A $10,000 investment in a fund tracking the S&P 500 at the end of 2006 would have grown to nearly $46,000 by the end of 2021, according to Putnam Investments.

But subtract the best 10 days from that 15-year period, and the total drops to around $21,000. “Time, not timing, is the best way to capitalize on stock market gains,” the Putnam researchers say.

The other reason: While past returns don’t guarantee future results, markets have historically rewarded investors for buying into the market after it experienced the kind of slide investors have seen so far this year.

As measured by the Wilshire 5000 – a broad US stock index – the first nine months of 2022 rank among the 20 worst nine-month periods of the past half-century, according to data from Compound Capital Advisors.

In all but one of these cases, the index posted a positive return in the one-year period following the nine-month decline, with an average return of 12%. Over the next three years, the index was positive every time, with an average gain of 41%.

Put simply in a tweet by Compound CEO Charlie Bilello: “Has selling AFTER 9-month declines been a good strategy for long-term investors in the past? No.”

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