Bulls, Bears, and Corrections – Why time in the market beats timing the market

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The Dow Jones Industrial Average, Wall Street’s oldest stock market index, officially entered “bear market territory” this week (down +20% from recent highs). Crossing this threshold now means that all three of the major US stock market indices are officially in bear markets (the S&P 500 and Nasdaq indices did so earlier this year). Losing money hurts, so we thought it would be a prudent time to put historical context around market cycles and consider strategies on how to navigate them.

By the Numbers
Let’s start with some definitions – a stock index is in a bull market when it is greater than 20% above its prior low, in a bear market when it is at least 20% below its previous peak and in a correction when it is between 10-20% below its previous peak.

Historically, bull markets last longer but it is the bear markets that get remembered. The 2008 Financial Crisis, the 2000 Dot Com Bubble, and “Black Monday” in 1987 are three of the more recent and infamous bear markets.

Dating back to 1942, the S&P 500 has experienced 15 bull markets, 14 bear markets and 31 corrections so volatility in the markets is historically normal. However, if you look at the duration and market movements between bull and bear markets you will see two positive reinforcing trends – bull markets last longer (~4x longer) and result in a significantly greater total performance change (+150% vs. -31%)

Even still, watching your account balances erode is uncomfortable. What should an investor do?

Time IN the market > TimING the market
One strategy is to follow the herd. As the market sells off investors typically attempt to stop the pain by selling investments while they are declining with the intent of reinvesting once the skies clear and the market begins to go up. Sounds great in theory. You do have to ask yourself if it were that easy why your taxi driver is still driving a taxi instead of sitting on a 500’ yacht in The Maldives. The answer is that it isn’t easy because you must be right twice – when to get out and when to get in. Most investors focus on the getting out part and forget about the getting back in part which requires far more fortitude.

Unfortunately, no one, not even the experts on Wall Street, has a crystal ball that tells us when a bear market will end or a rally will begin. A typical lifecycle of a stock sees it goes through many average days, with periodic swings, up or down. This leads to another risk – missing the best days.

The graph below illustrates the theoretical performance of a $100,000 investment in the S&P 500 over a 10-year period ending Dec. 31, 2021. If you had remained invested the entire time, your $100k investment would have achieved a return of 362.58% ($462,575). However, what’s more telling from this graph is the result of investment days missed. Suppose you tried to time the market and missed the 10 best investment days over the 10-years, your return would have been 157%. Even worse, had you missed the best 51 days, your return would have been negative (-1.34%). It’s important to remember that markets tend to go up over the long term, so remaining diligent with your investments and staying in the market give you the best chance of participating in those gains.

Intelligent Investors Last, Tough Markets Don’t
2022 has been a rough year for investors and we aren’t here to minimize the real financial impact or emotional toll. What we are here for is to advocate for patience and prudent planning. Having a strategy and remaining diligent have been stalwart ways to grow your wealth over long periods of time and since most of us are truly long-term investors we should remember – Bear markets are tough, but not forever.

Why Work with a Financial Advisor? Russell Investments
History of U.S. Bear & Bull Markets, First Trust
Stock Market Historical Tables: Bull & Bear Markets, Yardeni Research, Inc.

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