“What we learn from history is that people don’t learn from history.” – Warren Buffet.

“What we learn from history is that people don’t learn from history.”

• Warren Buffet

Market crashes and economic downturns are a part of life. Market calamity can occur seemingly out of nowhere. Whether it be a dot-com bubble, a financial crisis, Brexit or Covid-19, we can never predict the full impact of a new market crash. We can, however, forecast that its effect on the markets, and the wider economy, will ultimately be temporary.

When faced with such a calamity, investors can choose to let emotions such as fear and anxiety drive them to sell into a falling market. They could be forgiven for doing so, as crashes follow a set pattern; a whiff of fear which is then stirred by a media frenzy, creating mass panic and a spiralling fall in stock prices. 

However, investors could equally choose to ride out the storm which historically doesn’t take too long to blow over. Research shows that the average duration of a bear market is about one year, compared with approximately four years for the average bull market. The average decline of a bear market is 30%, while the average gain of a bull market is 116%.[1]

Media Sensationalism & The Markets

The media will always sensationalise what is happening during a bear market. Papers don’t sell en masse when the headline reads “MARKET CRASHED YESTERDAY. RECOVERY CERTAIN.” Instead, their dramatic coverage sparks waves of irrational behaviour throughout society.

Faced with this, should one decide to sell their investments, they may feel an initial sense of relief at having cut their losses while they take refuge in safer havens which provide scant returns. In doing so, they are likely to incur trading costs. They are also more likely to buy back in once they see the market begin to recover – at which point they will incur a second wave of costs.

It can be challenging to remain invested as market prices decline, however, history would suggest that a bear market is temporary and when it does end, the subsequent bull market can erase the declines and even extend the gains of the previous bull market.

The Importance of Courage in Investment 

The big risk for the investor who does incur two rounds of costs during the downturn is missing out on the days when the market rises the most. Timing the market is almost impossible. Investors who engage in market timing will invariably miss some of the best days. However, historically, six of the ten best days in the market occurred within two weeks of the ten worst days.[1] 

For more information on the significance of missing out on a handful of the best trading days, see our previous blog “Why does try to ‘time the market’ so often fail?”.

It sounds counterintuitive, but the best market days are often intertwined with the worst. In fact, in the past 20 years, 50 per cent of the S&P 500’s strongest days occurred during a bear market.[2]

Bear Markets and the Risk-Averse Investor

With this in mind, an alternative route for our risk-averse investor would be this: instead of selling on the way down, you should buy at a discount once prices have fallen. 

Accumulating more shares, even as stocks fall, allows one to build a portfolio on a lower cost basis. If one keeps the focus on their long-term investment strategy, emotions like fear and greed shouldn’t affect their course of action. 

If one contributes a certain amount to their portfolio each month, there is an argument to say they should continue doing that despite market ups and downs. If the target allocation is 80% stocks, and 20% bonds, one could re-allocate when stocks drop to restore their target weights at a relative discount.

The History of Bear Markets

In the 96 years since 1926, the S&P 500 has had 71 positive returns compared to 25 negative returns (74% positive returns). History shows that the longer we make this period, the greater the chances of a positive outcome; 84% of 3-year periods were positive ones, 87% of 5-year periods were positive ones and 95% of 10-year periods were positive ones.

The longest bear market in U.S. history was 2.5 years long (2000-2002). The next longest was the 1930 to 1932 bear market which lasted 2.1 years. The biggest drop in a bear market came between 1930 to 1932 when the stock market dropped 83% over 2.1 years.[1] In isolation, any such scenario is a daunting one, however on the assumption that a portfolio has been appropriately constructed, taking into account a client’s age, risk profile, capacity for loss and specific time horizons, these bear markets will come to an end and the very best days in which to be invested will arrive.

Independent Financial Advice in Stoke-On-Trent

Giliker Flynn is an independent wealth management company based in Newcastle, Under Lyme, Staffordshire. For over ten years, our wealth planners and financial advisors in Newcastle have provided our customers with high-quality financial, retirement planning, and investment advice designed to maximise their financial and investment opportunities. 

We are fully regulated by the Financial Conduct Authority (FCA). 

For a free, face-to-face discussion about maximising your financial opportunities contact Giliker Flynn today. 

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