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Bear Markets


A lesson on waiting for the fire to pass when it feels like your money is going up in flames

September 9, 2022

In the last few months, forestry and conservation groups have begun replanting the 27,000 acres lost in last year’s Greenwood wildfire near Isabella, Minnesota. In late May alone, 135,000 tree seedlings were planted across the seemingly barren landscape. While humans do all we can to rebuild the forest, it is remarkable to observe the regrowth that is happening without our help.

In fact, many trees today have evolved to be quite resilient. Take Minnesota’s own Jack Pine, a hardy tree that thrives in suboptimal, sandy soil. They are usually the first to sprout following a fire, but that’s not the most fascinating feature about them. Jack Pines are serotinous, which means they store their seeds in cones that require an environmental catalyst (i.e., a fire) in order to be released. After a fire, what appears to be a barren landscape, instead provides a new place where the Jack Pine can thrive with consistent exposure to light, minimal competition, and increased nutrients in the ash.

Now what in the world does all of this have to do with investing? Well, we think investors can learn something from the Jack Pine.

Forest fires are commonly used as an analogy for a recession or bear market, but little time is spent observing the trees (aka investors) in these illustrations. The trees are not passive members in some unstoppable phenomenon. Instead, they’ve adapted and evolved because the trees have come to expect fires, and the Jack Pine’s ability to thrive is a product of those expectations. So, if trees can evolve based on their anticipation of wildfires, can we, as investors, adapt by having healthier expectations of bear markets?

Let me share some quick facts about bear markets to help set those healthier expectations:

  1. A bear market is signified by a 20% or greater price decline in the stock market from its most recent high, which is typically tracked by a major index like the S&P 500 or Dow Jones Industrial Average.
  2. The bear market we are currently in is the 11th bear market since 1950, which means we’ve averaged one every 6.5 years.
  3. The average time it takes to reach the market bottom from the market top is roughly 14 months.
  4. The average price decline from the previous market high in a bear market is 35.6%.
  5. The average bull market following a bear market lasts 70 months resulting in a total gain of around 181% over that time.
  6. In only 3 of the last 11 bear markets has the bottom been lower than the bottom of the previous bear market. Two were due to the bear markets being less than 3 years apart and the other was the Great Recession.
  7. On average, it takes 3.5 years to return to the previous market high prior to the bear market.

Now, unfortunately, knowing these statistics doesn’t always help in the present moment. You can know these facts and prepare to the best of your abilities but having discipline when a bear market becomes a reality is by no means automatic or easy. In “A Wealth of Common Sense”, Ben Carlson reminds us that “the whole goal [of investing] is to match your future needs, dreams, desires, and objectives—your future liabilities—with current assets in your portfolio.” However, “over decade-long time horizons, your investment performance will mainly be derived from how you handle corrections, bear markets, and market crashes. During every single bear market there will be times when you wonder if the losses will ever stop. You will always wonder how much lower the market can go. The economic news will be terrible. Other investors around you will be depressed.” It seems then that we should also add this to our list of bear market expectations. The emotional expectations we carry are equally, if not more important, especially when we know the stakes—our needs, dreams, desires, and objectives are on the line.

So, in a time where information has never been more readily available, and resources for successful investing are abundant, are we taking advantage of the opportunity and adapting like the Jack Pine does with forest fires? We recently had a Q&A with Northwestern Mutual’s Brent Schutte and Ron Joelson, who are tasked with managing $500B, and many clients asked a similarly phrased question: “how can I limit losses without getting out of the market since I know it will go back up eventually?” The answer to that question is simply time, and the greatest barrier to allowing time to work in our favor is our mindset. Healthy expectations can make all the difference.

Think about this: we now know that the average bear market lasts 14 months with an average pullback of 35.6%. The average bull market lasts around 70 months with a total gain of about 181% over that time. Let’s use this hypothetical scenario for context. If we invested $100,000 at a peak and an average bear market sets in, followed by an average bull market, our $100,000 would be worth $180,964 after 7 years. That’s an annual average return of 8.5% even with abysmal market timing. However, it probably didn’t feel like that would be the case when your $100,000 turned into $65,000 before nearly tripling in value over the next 6 years. Many of us are probably feeling that way right now, but the only way we could wind up with 8.5% average annual returns is by riding it out.

So, what’s our Jack Pine defense mechanism equivalent to protecting our seeds when it feels like our money is going up in flames? Although this is not an exhaustive list, we’d like to bring attention to two.

Determine how much “safer” money you need to hold to keep you from selling stocks in a bear market.

To each person, this number is different. It’s a question of risk tolerance, and it can be accomplished in a variety of ways: cash, bonds, accumulated values in permanent life insurance to name a few. You know, the options that no one really wants to hold in a bull market because they get low, single digit returns. But here’s another way to look at it: if your safer money is earning, say 2%, but you have enough in this bucket holding value during a downturn, and it keeps you from selling, that 2% is worth far more than just the actual 2%. As Morgan Housel says in “The Psychology of Money”, “Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time—especially in times of chaos and havoc—will always win”. If the money you have in stocks isn’t needed for today, let time do what it does best.

Determine what rate of return you need to earn for your goals, dreams, and objectives to be a reality in the future.

Have you ever had your financial planner do this before? It’s amazing how freeing it is when your plan still shows overall success with only 4% returns. Or what if the analysis showed even after a 20% decline, assuming average returns here on out, you could still retire at age 60? What if you had a plan that could withstand two bear markets every decade without your goals and dreams being compromised? Think about what you could gain back that maybe you didn’t have in previous market downturns. Time? Peace of Mind? Confidence?

Perhaps take a moment to honestly reflect. Do you believe, as Ben Carlson says, that “the whole goal [of investing] is to match your future needs, dreams, desires, and objectives—your future liabilities—with current assets in your portfolio”? If you do, and your well-designed financial plan shows a success despite the current economic turmoil, then hopefully you can take comfort in knowing that you can wait for the forest fire to pass – simply block out the noise, turn off the news, and go spend time doing the things you love with the people you care most about.

That’s our goal at Voyage as we work with clients: to craft a personalized financial plan that allows you to live now and worry less, while still protecting what’s important to you. The basics of portfolio management are clear—proper risk tolerance, diversification, having an investment policy statement, sound investment research—but none of it matters if we don’t have a plan focused on fulfilling goals and optimizing life satisfaction. Click here to learn more about how Voyage can help you craft a financial plan designed to weather any storm (or fire).


The opinions expressed are those of Voyage Wealth Architects as of September 9, 2022 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss.

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