How to Stay Afloat in an Extended Market Turndown: Part One

Sep 9, 2022

Understanding the Problem

Let’s not sugar the pill. It doesn’t matter whether you’re 36, 60 or older, for investors there’s only one word to describe what’s going on out there: bear.

We’re in a bear market, defined as a stock market downturn of 20% or more. While it’s true that the Dow Jones has taken more of a hit than our own TSE 60, many of us are getting mauled.

Contributory Factors in Today’s Market

While no one really knows what causes so-called bear markets, which is why predicting them is next to impossible, here are a few contributory factors that have precipitated what we’re experiencing right now:

  • Rising interest rates add to the cost of borrowing, which slows growth
  • “Black swan” events – defined as an unpredictable occurrence with severe consequences (Covid 19 being one such event) which disrupt supply chains and drive up the price and availability of goods
  • Political crises, such as the Russian invasion of Ukraine, can induce pessimism in people, which puts a brake on investing

When all these types of events or things happen concurrently – there have been many other similar situations throughout over the years – you get the conditions that will potentially cause a market downturn and possibly precipitate a bear market.

A History of Bear Markets Since 1946

Here’s a history of bear markets and subsequent recoveries since 1946 – the first year of the boomer generation – as measured by the S&P 500:

  • 2007-2009: down 57% over 1.4 years
  • 2000-2002: down 49.1% over 2.5 years
  • 1987: down 33.5% over 101 days
  • 1980-1982: down 27.1% over 1.7 years
  • 1973-1974: down 48% over 1.7 years
  • 1968-1970: down 36.1% over 1.5 years
  • 1966: down 22.2% over 240 days
  • 1961-1962: down 28.0% over 196 days
  • 1957: down 20.7% over 99 days
  • 1948-1949: down 20.6$ over 363 days
  • 1946: down 26.6% over 133 days

4 Points to Understand

A few thoughts from this blogger, who has seen a few bear markets (and recoveries) in decades past.

  1. As we’ve mentioned, bear markets occur when a market index tracks a market decline of at least 20% from a recent peak.
  2. History proves that bear markets tend to recover and increase to higher levels, offering higher returns for those who endured them. Keeping your nerve is key.
  3. Bear market recoveries generally provide the most returns based on time in the market.
  4. You shouldn’t cut your contributions to your retirement accounts during a bear market. That’s self-defeating.

In part two of this blog series, we’ll give you some suggestions about building a game plan that will help minimise the damage. Stay tuned!

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