Most people consider a bull market to generally take place when the market goes up, and a bear market when the market goes down. Most people don’t know what constitutes a bull or a bear market. That should not be a surprise. The stuff they call financial news is mostly junk to be able to fill a 24 hour news cycle. I don’t remember having any courses in school to give some education on the matter. Shoot, if you go online you will see that my industry does not even agree on a single definition. But it is important for you to understand what a bull market is, as what is a bear market is, as they require entirely different investments styles to successfully negotiate both bull and bear markets.
We can delve into some more data about secular and cyclical markets, but not today.
My firm, Research Financial Strategies, uses a simple but effective system that defines a bear market as a market decline of 20% or greater as measured by the S&P 500 index.* I like this definition of a bear market because some may say they can tolerate a 20% loss, but most feel differently when the loss is happening to their account. By the way, we work very hard to avoid a sizeable part of a decline of that magnitude.
Since 1929, 16 bear markets have occurred. They happen on average every 5.3 years, and the average depth is a 38.4% decline. The average length of a bear market is 17 months, and it takes an average of 60 months to recover the loss.**
I have told you how I define a bear market, so if 20% is the decline that constitutes a bear market, we must still be in a bull market that is now 65 months old. Does it sound like I am predicting a 17th bear market? You bet. I know that a bear market will eventually take place, but have no idea as to when that will be. Averages are just a simple arithmetic measurement, and are often taken as a rule or something. Market changes are reliant on any number of factors, and time is not a factor to give much weight to.
What is important is that you understand bear markets require different asset allocations than the allocation that worked in the last bull market. I would make the case that it is not practical to wear summer clothes year round in this part of Illinois, anymore that it is practical to wear the same portfolio in both bull and bear markets.
I was a young man working through the bull market of the 1990s. I started in 1982, so I was caught off guard as most were when the bull continued to run. We used to joke that a blind monkey with a couple of darts could pick winning stocks with a toss at a stock chart. We had a couple of sharp and short bear markets, but they were quickly forgotten. If you owned equity investments during the 1990s, you probably have fond memories. But the party ended with a new millennium crash of that began in March 2000, lasted 31 months, and reclaimed 49.9% from the average investor. All those great portfolios built in the 1990 were crushed. Imagine if you retired on January 1, 2000, and saw almost half your portfolio go up in smoke. (More about Sequential Risk)
Back to the topic; we find ourselves today in a bull market that is showing some weakness, and a narrowing of leadership. Now is not the time to panic and bail, but a perfect time to evaluate, and if needed, prune any weak holdings from your portfolio, and have a plan in place should we actually slip into bear market number 17.
If you would like a free evaluation of your current portfolio, call Nate or Kristi at 217-337-5584 and they will set aside 45 minutes with me to evaluate and discuss your results.
You really need to know where you are before you continue your journey. We can help you find those coordinates.
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* The Standard and Poor’s Stock index (S&P 500) is an unmanaged index generally representative of the U.S. stock market without regard for company size and cannot be invested in directly.