There have been 10 bear markets since World War II. The average bear market lasts 15 months, according to the Leuthold Group, Minneapolis. They were as short as three months in 1990. But they lasted slightly over three years from 1946 through 1949. The average loss in a bear market was -28.7 percent. The range was as little as -20 percent in 1990 to -48 percent in 1973 and 1974. The average time it took investors to recover from a bear market was almost 18 months. That range was six months in 1990 to 70 months following the 1973 and 1974 bear market.
Here are the rules for dealing with a bear market:
- If you have investments that make you uncomfortable, get out. Investments that make you uncomfortable are bad choices to begin with, because whenever you make an investment you must consider the worst case. And if the performance is worse than your worst case, get out of a bad situation. Do not worry about taking a loss. You will reinvest in a more suitable choice and when the market rises, your new choice could have an equal chance of rising in value (besides, the IRS will share your loss with you).
- Get real. If some adviser told you to expect 14% annually, or if you thought that’s what investments paid, it’s time to get the facts. Plan on 10% as a conservative long term return (a conservative estimate that’s based on performance of the S&P 500 index since 1926 but remember that past performance does not guarantee future results).
- Get your investment risk aligned with what’s comfortable for you. Do not invest for high returns; that's an opportunity for disaster. Select investments that meet your risk tolerance and let the market take care of the returns.
Bear markets have always come and gone. If your portfolio is not designed to handle them, it’s a bad portfolio. If your portfolio has caused you concern, it was probably ill-designed to begin with. You can have it realigned to better meet your profile.
