October is historically known as one of the rougher months for investing in the stock market, and that view was reinforced last week when major indexes suffered steep losses, fueled by higher rates and a sell-off in tech shares.
Last Wednesday, the Dow Jones plummeted 831.83 points, the third-largest single-day point decline in its 122-year history. The S&P 500 dropped 94.66 points, its fourth-largest single-session point decline of all time, and the Nasdaq tumbled 315.97 points, the third-largest decline in history.
Not surprisingly, volatility in the markets and a long-lasting bull market have sparked concern and fears of a bear market. As an investor, should you fear a bear market? My answer is no. Here’s why:
Corrections are a healthy and regular part of the investing cycle
To begin with, we all know that the bull market can’t last forever, so investors shouldn't be surprised when the stock market heads lower. Markets never continue going up in a straight line, and market corrections are healthy as well as a normal part of the investing cycle.
According to market analytics firm Yardeni Research, the S&P 500 has dropped by at least 10% on 36 separate occasions since 1950.And since 1982, only two corrections have taken longer than 10 months to fully find a bottom. Our takeaway from this is that bear markets typically don’t stick around very long, based on historical data.
Statistical data shows long-term investors have little to fear
Digging a little deeper into those 36 stock market corrections since 1950 that I referenced above – each and every one of those corrections was completely wiped out by a bull market rally. Historically, bear markets have happened every three to five years, varying in length from 45 days to 694 days. On average, they lasted about a year and cost investors at least 20%. The key here is to keep the big picture in mind!
From an economy standpoint, recessions are inevitable, but investors should not fret about them – the U.S. economy has spent about 86% of all months since the end of World War II in expansion mode. Preparation, diversification, and sound investment strategies will help you ride out the bear market.
Bear markets become bull markets
Do you see the glass as half full or half empty? I prefer the half-full view. Knowing that bear markets always end, the mistake you don’t want to make is being out of the market. Once a bear market ends, the 12 months after that can see crucial market gains. You don’t want to try and time the market, nobody has a crystal ball! From 1996 through 2015, the S&P 500 returned an average of 8.2% a year, but if you missed out on the top 10 trading days because you were trying to time the market, the returns shrank to just 4.5%. And If you missed out on the top 20 trading days, your returns came in at just 2.1%.
The bottom line is to stay the course and don’t be worried by the sensationalist headlines you see in the media. Have a solid investing strategy and stay the course. Want to dig deeper? Contact me.