To US Financial Professionals servicing non-US persons

“Are we there yet?” How to stay on track until the bear market is over

Ben Rizzuto, CFP®, CRPS®

Ben Rizzuto, CFP®, CRPS®

Retirement Director


Jul 12, 2022

While we can’t predict when the current bear market will end, we can prepare ourselves for the journey that lies ahead. Retirement Director Ben Rizzuto provides a U.S. perspective, discussing how, as with any long road trip, having the right supplies can help stay on course to a destination – despite the inevitable detours.

You’re driving down a long highway and then out of nowhere, you hear it: “Are we there yet?” The question usually comes from the backseat from someone who feels the trip has gone on “forever.”

Your answer may vary. It could be “we’ll be there soon,” or “in a little while,” both of which are hopefully short enough time periods to keep passengers appeased yet sufficiently vague that you haven’t made any promises about your actual arrival time.

The question “Are we there yet?” is synonymous with the summer road trip, but with the current volatility and our recent entry into a bear market, investors may be asking the same question. More specifically, they may be asking, “When will this wild ride be over?”

To answer that question, we need to consider two additional questions: When will markets reach a bottom and, once that happens, when will they reach their previous high?

A bear market occurs when prices fall 20% or more from recent highs.

Where is the bottom?

If we look at bear markets going back to 1950, we can see that there is a lot of variability. In the case of the 1957 bear market, the bottom was reached after only one day. Taking the U.S. as an example, our most recent bear market in 2020 found its bottom after only 11 days. With the 1957 bear market, the S&P 500® Index only dropped another 0.1% while 2020 saw the index fall 9.8% from when the bear market began.

On the other end of the spectrum, the U.S. bear markets that started on March 12, 2001, and July 9, 2008, lasted 576 days and 243 days and saw further losses of 34.2% and 45.6%, respectively. Taking the 10 bear markets since 1950 into account, the median length has been 81.5 days and the median loss of the S&P 500 during that period was -9.0%. The averages were 154.3 days and -16%.1

The second part of the equation is how long will these bear markets last after reaching a bottom, and how long will it take to regain the losses that have been incurred? During our most recent bear market in 2020, it took the S&P 500 148 days to reach its previous high. However, looking at the 14 bear markets that have occurred since World War II, on average, they have experienced a decline of 32.5%, have lasted 14.5 months, and then took two years to recover those loses.2

With these historical precedents in mind, the answer to the question, “Are we there yet?” is probably something like, “It’s going to be a while.”

What to do along the way

It’s normal to feel apprehensive about what lies ahead, especially since history tells us this bear market could go on for a while. But as with any journey – or cross-country summer road trip – it helps to be prepared and arm yourself with ample supplies.

Following are four considerations to help investors through this downturn and seek a safe arrival when it comes to an end.

A map

The key to any successful road trip is to have a map and plan your route. For investors, this map would be akin to your financial plan or investment policy statement. It’s important to know where you’re starting from and where you hope to end up. This could include goals such as retirement or college funding as well as the asset allocation (route) you’re going to take to reach those goals.

What’s important to remember is that, just because we run into one of these financial bumps in the road, it doesn’t mean our goals or destination changes. If you’ve already driven halfway across the country, you’re not going to turn around just because you encounter an obstacle. Sure, the timeline might change and the hotels you stay at along the way may be different, but your goal should be to reach the same destination you originally set out for. Having a map and reminding yourself of that long-term goal allows us to zoom out, gain perspective and tamp down some of the emotions that go along with financial losses.

Periodic stops

Any long trip in the car requires an occasional stop, whether it’s to stretch your legs, run around the car to wake yourself up, or go to the restroom. These stops help keep everyone’s energy up by breaking up the monotony of the trip.

Our financial journey through this bear market may require periodic stops as well. We can stop to review our route and check to see if we are still on track to meeting our goals. If the markets are stormy, as they are now, more frequent stops may be helpful. So if you normally review your portfolio

Sunscreen

Whether to shield the arm that rests on the windowsill as you drive or for the kids who believe they are invincible to the sun’s rays (only to be hot, tired and crabby after getting sunburned), sunscreen is a must for any travel bag.

During this bear market, a level of defense may be useful in your portfolio as well. You’ve created an asset allocation over the past several years that has probably served you quite well as the markets have steadily moved upward. While that’s been nice to see, it may mean that your assets have moved away from your target allocation through this growth. If that’s the case, it may be time to rebalance your portfolio.

While consistent rebalancing has been shown to add 26 basis points of return to portfolios3, depending on your goals, this may not seem sufficient, during a bear market. If that’s the case, you may consider making a larger change to your asset allocation; for example, some investors may be contemplating increasing their fixed income exposure. However, it’s important to remember that these types of changes require you to time the market correctly, both on the way out and on the way back in, which can be difficult.

Finally, in periods like this, you may say, “I can’t take it, I need to go to cash.” This may feel like the right thing to do and may help you sleep at night. And while I do understand that investing is very personal and money issues are incredibly emotional, there are several secondary issues that may arise from this short-term decision.

The key is to try to find a balance between easing your financial anxiety in the short term and staying on track to your long-term goals. Sure, going to cash may feel like the simple answer right now, but it could lead to a very complex and even more difficult situation in the future when you need your assets to have grown to meet a specific goal.

Snacks

One final must-have on any road trip is snacks. I know with my family, if anyone gets hungry while we’re on the road, the likelihood of a bad mood increases exponentially. It also helps to have small snacks at regular intervals. A handful of trail mix or a few pieces of red licorice (my personal go-to) will help pass the time and keep everyone’s blood sugar at a good level.

Snacks can be helpful for making it through a bear market, too. But instead of consuming, smaller, more consistent amounts are invested. This approach, known as dollar-cost averaging in the U.S., is a way to gradually continue investing in the market instead of investing a lump sum. The approach can help investors deal with feelings of loss aversion and other emotions we may experience for however long this bear market continues. Plus, it allows an investor to buy more shares in companies when they’re less expensive – as many are right now – which can lead to having more shares overall at a lower average cost per share.

Exit ramp

We don’t exactly know when this bear market will end. Our exit ramp may be a few miles down the road, or it may not come for some time. While dealing with that uncertainty isn’t easy, we must continue our investing road trip to stay on our chosen route toward our future goals. And even though there are times during a road trip when the kids are screaming, the baby’s crying, your spouse is starving, and you’re ready to turn the family automobile around and just go home, remember why it’s important to persevere. Whether it’s a once-in-a-lifetime trip, going to a theme park, or saving for a comfortable retirement, our long-term financial goals can only be met with consistency, planning and staying on the road – despite the inevitable detours.

 

1 “7 Things To Know Now That The Bear Is Here.” LPL Research. June 15, 2022.
2 “Here’s how long stock market corrections last and how bad they can get.” CNBC. February 27, 2020.
3 “Putting a Value on Your Value: Quantifying Vanguard’s Advisor Alpha.” Vanguard, February 2019.

Basis point (bp) equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.

S&P 500® Index reflects U.S. large-cap equity performance and represents broad U.S. equity market performance.

Volatility measures risk using the dispersion of returns for a given investment.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

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