Lessons of past bear markets

The Savage Truth

There will be another bear market. You can count on it, but you can’t be certain when it will start.

The other thing you can count on is that it will have a huge impact on your investments and your retirement plans.

If you are still in the accumulation phase of your life, the next bear market will be an opportunity for you to buy more shares with your fixed monthly investment in your retirement plan, assuming you have the discipline to stick with your plan. But if you are approaching retirement, a bear market could change your time schedule and shake your emotional well-being.

The pain of bear markets tends to dim as time passes. So perhaps this is a good time to look back on some scary statistics, keeping in mind that — despite all previous collapses — we have survived and moved on to new market highs.

A bear market is defined as a decline of 20 percent or more in the Dow Jones Industrial Average, but the most memorable bear markets far exceeded that benchmark. Consider these examples from the past 50 years:

The 1973-74 bear market saw the Dow Jones drop from a high above 1,000 to a low of 570 — a decline of 48 percent. That bear market wiped out the “fabulous 50,” a group of stocks that people believed would never see a significant drop. These included McDonald’s and Avon Products (consumer stocks that seemed to have no upper limit) and the tech stocks of the day, such as IBM and Digital Equipment. Some companies survived share price drops of 70 percent or more and went on to make a fortune for their owners; others withered away.

The 1987 market crash saw the Dow fall 508 points in one day, and a total of 45 percent within just a few trading days. The market rebounded within two years, but few who were on the trading floor in those days will forget the panic of watching money melt away on Oct. 19, 1987.

The dot-com bubble burst in early 2000, causing a shocking crash in tech stocks. The NASDAQ index, based mainly on tech companies, lost 78 percent from top to bottom and took many years to recover. In fact, popular stocks of the day like Pets.com and Webvan (a grocery delivery firm) failed to ever return, even though the concepts live on successfully today at Petco and Peapod. Timing is everything.

The most recent crash, the 2007-2009 bear market, took the Dow down 55 percent. It fell from a high of 14,164 in October 2007 to a low of 6,443 in March 2009. Yet, here we are with the Dow close to 23,000 just a decade later. Those who continued to invest on a consistent basis in their retirement plans reaped huge rewards; those who sold in a panic locked in permanent losses.

That brief history of past bear markets is something investors should keep in mind today. There are two lessons to be learned.

The first lesson is that long-term investing works, and America has survived all past financial crises, but it can take time. How much time? Well, according to Ibbotson market historians, there has never been a 20-year period where you would have lost money in a diversified portfolio of large company American stocks (the S&P 500 Index) if you reinvested the dividends. And that’s true even if you adjust for inflation.

The second lesson is more painful. It is the lesson of plans changed and lives disrupted, because people didn’t understand the impact of these huge declines on their emotions. No matter what your age or stage in life, it’s hard to imagine how you will react when you see a significant portion of your money wiped out.

There’s an old stock market saying: No one ever rings a bell at the top of the market (telling you to get out). But it’s a lot easier to make that decision when you’re sitting on a decade of profits and the markets are liquid. Sure, it’s tough to look back and say you sold too early. And even in retirement, you’ll need some exposure to stock market growth.

But there’s another old market saying worth keeping in mind: Bulls can make money and bears can make money, but pigs get slaughtered. That’s the Savage Truth.

Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” She responds to questions on her blog at TerrySavage.com.

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