Patience is a virtue. And nowhere is that more true than in the investment world.
Of course, the knowledge that if you sit tight and stay the course, your portfolio will eventually recover is of little comfort in the midst of a bear market. Reviewing statements of plummeting portfolios can make it next to impossible to remain focused on the long-term. Yet, as Mark Hulbert points out in “Bear Markets May Not Be as Ferocious as They Appear,” you may not have to wait too long for your portfolio to bounce back. He writes, “History shows that typical bear-market recovery times are hardly ‘the long run.’ Since 1926, it has taken an average of 3.3 years for stocks to surpass their high set before the typical bear market began.”
Hulbert points out that our perception of bear-market recovery times can be misguided by the fact that the Dow Jones Industrial Average didn’t surpass its 1929 pre-crash peak until 1954, 25 years later. He argues, however, that the Dow paints a distorted picture of the recovery because it tracks just 30 stocks and doesn’t include dividends. He also notes that, “According to data compiled by Yale University professor Robert Shiller, a dollar’s purchasing power grew by more than a third between 1929 and 1933. So a big chunk of the Dow’s apparent decline disappears after we adjust for the deflation.”
After correcting for all three of these factors, Hulbert finds that the stock market surpassed its 1929 pre-crash high in March 1937–just 7½ years later, a far cry from 25. The recovery time from the 2007-09 bear market was 5.3 years to January 2013.
Hulbert stresses that these two recovery times were longer than the market’s 90-year average because the steep bear-market losses were far worse than the norm. From 2007 to 2009 the Dow declined 55%. Between 1929 and 1932, the market fell 80%. (If you’re wondering, the average loss of the bear markets on Hulbert’s list was 30.2%, adjusted for inflation and dividends.)
What’s the key to riding out downturns and staying invested for the long-term? A globally diversified portfolio with an asset allocation strategy based on your goals and risk tolerance. That’s especially true today when the U.S. market’s average return may not be as high as it was in the past decades.