Our Insights

About personal finance, investments and markets.
May 16, 2017

Putting bull and bear markets into perspective

Many investors understand the importance of allocating money to the stock market to help them generate higher long-term returns. However, most investors are equally worried about a market crash. We think it helps to put bear markets into context when we visualize the market expansions and contractions over the last 100+ years. It becomes clearer that bear markets have historically been the exception rather than the rule.

Anatomy of bull and bear markets

The following chart shows the historical performance of the S&P 500 index from 1903 to 2016. Bull markets are in blue and bear markets in orange. Although past performance is no guarantee of future results, we can immediately see that bear markets are much smaller than bull markets.

  • The average bull market lasted 8.1 years with a total return of 387%
  • The average bear market lasted a much short 1.5 years with a total loss of 35%

USA2

The picture is similar for the UK and Continental Europe.

UK2

Europe ex UK2

Don’t focus on the outliers

The conclusions are hardly earth shattering but it is important to remember:

  • Market corrections do happen – but they are not very frequent
  • Over long periods of time, the returns from bull markets eclipse the losses from bear markets
  • The dominant and more costly error for investors is therefore being out of the market when it’s a bull, not being in when it’s a bear. Remember, successful long-run investing is a mental game more than anything else!
  • Nobody can reliable predict all market crashes. It is therefore not worth trying. The best way to reduce the volatility of your portfolio is to align the equity/bond mix with your personal risk profile
  • Equities are not suitable for investors with an investment horizon of less than 3-5 years because it often takes years for markets to recover from their losses

It seems ironic that in investing, the secret to winning is first learning how to put up with losing…