How to Befriend a Bear Market

How to Befriend a Bear Market

Fight the instinct to run away. You may be better off feeding it money

Nobody likes a bear market. The Dow deeps more than 30 percent on average, downdrafts usually last over a year, and it often takes the market another year to recover. But bear markets aren’t all bad. In fact, they can be great buying opportunities.

Consider, for example, the bruising bear market of 1973 and 1974, one of the worst the U.S. has experienced in the XXth century. The Standard & Poor’s 500 stock index lost 43 percent, even with dividends reinvested, and didn’t rebound to its 1972 level until mid-1976.

Nevertheless, people who steadily invested in stocks would have done pretty well. By January 1976, in fact, they would have come out ahead of someone who had put the same amount into Treasury bills, even though T-bills were paying a respectable 6 to 7 percent a year at that time.

The analysis assumed that an investor put $100 a month into stocks beginning in January 1973. When the market hit bottom in September 1974, the investor would have invested a total of $2,100 and held stocks worth less than $1,500. But seven months later, the investor would have been about even with the $2,800 that they had invested. And by the first quarter of 1976, as the stock market was just returning to its previous high, the investor would have had more money than if he or she had instead invested $100 a month in T-bills.

Despite a brief dip in 1979, the long-term outlook remained bright. By the end of 1992, the investor’s $24,000 stake would have been worth $124,000 – more than twice the $54,000 it would have earned in Treasuries.

The average bear in the XXth century lasted 410 days the Dow Jones industrial average dropped some 31 percent. On the upside, there have been 31 bull markets in the same period. On average, they lasted about two years with a near 85 percent increase in the Dow. The last 10 bulls of the century haven’t run quite as strong, however.

Manhattan, New York Downtown. Photo by Elena

Riding out a recession

Like a bear market, recessions reward those with patience. In fact, there are investors who would sooner plunge into the Arctic than the stock market during a recession, which often coincides with a bear market. But many pros say investing when the environment looks bleak could turn out to be a boon. Stock prices – like the price of clothing, cars and condos – also plunge during an economic slowdown. Investors buying stocks for the long run then could end up with solid returns.

Recessions generally last about 11 months, with the market turning up 6 months before the economy picks up. Returns vary, depending on when you invest – before, during or after a recession. The most lucrative time: at the midpoint of a recession. Those who buy at a recession’s start make huge profits. Those who buy at a recession’s midpoint and hold for 12 months after the recession rake can earn even more. Even those who wait until the tail end of a recession to buy can be richer by dozen or so percent one year later.

Tip: Look always at industry groups that lead the way out of past recessions and that have historically scored big gains in the first 12 months after the stock market has bottomed out and their average percent gain, advise Wall Street’s most respectful analysts