Long Term Investing and Bear Markets

ByTroy Davis

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Tour de France cyclists are in incredible physical shape, but even they need to rest to stay healthy. Like these great athletes, sometimes great financial markets need to reset from record-setting performance as well. Bear markets are nothing new, they are as absolute as death and taxes. So, if we are going to have bear market cycles, what’s the good news? They end. Equity markets have recovered 100% of the time from bear market cycles. Here are a few things to keep in mind about Bear Markets.  

  • 20% is the magic number: Market cycles are measured from peak to trough, so a stock index officially reaches bear territory when the closing price drops at least 20% from its most recent high. A new bull market begins when the closing price gains 20% from its low.
  • They happen all the time. There have been 25 Bear Markets in the S&P 500 index in the last 90 years as well as 26 Bull Markets. In years, bear markets took place for about 20 of those years with bull markets the other 70 years. Put another way the stock market typically goes up 77% of the time.
  • Stock markets fall 36% on average in a bear market and gain 108% on average in a bull market.
  • Bear markets tend to be short averaging around 10 months while bull markets typically average 2.7 years.
  • They are impossible to predict. Even though we are bombarded with market timing news, fundamental and technical indicators, and sentiment data, none of this will help you figure out when and why investors start to panic and sell.
  • Long term financial strategies only work if you stick with them long term. Short term panicked selling leads to realized losses every time.
  • Nearly half (48%) of the S&P 500 Index’s strongest days occurred during a bear market. Another 28% of the market’s best days took place in the first two months of a bull market – before it was clear a bull market had begun. In other words, the best way to weather a downturn is to stay invested since its impossible to time the market’s recovery.

As an investor during a bear market it is very important to focus on the long term and not let your emotions make decisions. Fear and greed are powerful motivators but horrible decision makers. Bear markets will provide an opportunity to increase your returns as your portfolio is re-balanced, for those who stay focused.

To learn more about long-term investing or answer any questions you may have please contact Davis Capital Management’s office. We are happy to discuss what investment opportunities may be available to you.


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