Is The
Bear as Bad as He Appears?
By Ralph Kydd, editor
The Global Advisor
Over
the course of the past year and a half, many investors, for the
first time, have shaken hands with the bear, after riding the
bull through nearly the entire 1990s. Although the overall market
has rebounded somewhat from its recent lows, the bear remains
a gloomy presence for many investors. But just how bad is this
bear market? How does it compare with other bear markets, and
with bull markets? How long do bear markets last?
Before answering these
questions, let's begin by defining a bear market. Definitions
vary among investment experts, but typically it's considered
a 20 percent drop in the market (usually the Dow Jones Industrial
Average benchmark) over a period of two months or more. Smaller
drops, or sharper drops that are very short, are commonly viewed
as "corrections." Some calls are close. The gut-wrenching
plunge of the Dow in October 1987 is usually called a bear market,
though the decline of 36.1 percent, which actually began in August
1987, lasted slightly less than two months. Many investors new
to the markets during the 1990s may not realize it, but bear
markets are a rather common phenomenon. In fact, there have been
14 of them in the last half-century, occurring roughly every
3.5 years. According to figures from Crandall Pierce & Company,
these declines in the Dow have lasted an average of 12 months
and suffered a median decline (half more, half less) or just
under 23 percent. Of course, averages can be misleading. A bear
market in mid-1990, the last one before the long bull market
began in October of 1990, hung around a mere 2.8 months. At the
other extreme, the 1973-74 bear market lasted a grueling 22.8
months and knocked off 45 percent in stock values.
The current bear market,
already over 16 months old, started in mid-January 2000 and had
declined 19.9 percent by late March 2001. While it had recovered
much of that, it won't officially end until the market recovers
to its mid-January 2000 high, according to Crandall Pierce.
During the same half-century,
there have been as many bull markets as bear markets. These bull
markets averaged twice as long as the bear markets and ran up
65 percent in value on average. The shortest bull market was
11 months, the longest 111 months. The smallest gain was 22.3
percent, the largest was 396 percent.
Yet, even these numbers
don't tell the full story about the bear markets, let alone their
impact on your portfolio. Take the 1973-74 decline, considered
the worst since the Great Depression. If you didn't sell out
during the decline, you recovered nearly all you lost on paper
by the end of 1976.
Take even a longer
view. Consider the 1966 to 1982 stretch. By 1982, the S&P
500 was still 22 percent below its 1966 high. Yet, according
to Ibbotson Associates, the S&P 500 returned an annual average
of 5.1 percent during those years. That's below its historical
average, but not nearly as bad as many view that period. What
accounted for that average?-reinvested dividends, which made
up a much larger portion of total return than dividends do today.
None of this to say that bear markets aren't rough on portfolios. The toughest part is coming back from large drops. Say your portfolio loses 45 percent in a 73-74 type bear market. To recover that loss (without investing any more money), you'll need to earn 81 percent. That's because you're working with a smaller amount of money than what you had when the decline started.
The best strategy for recovering from bear markets is to minimize the impact of a market decline in the first place. Review your goals and objectives, stay diversified and don't panic. Avoid overloading in a single sector (such as technology) and invest for the long term so you don't have to sell, or sell as much, during a down market.
Editor's Note: Ralph Kydd is Managing Editor of The Global Advisor, Box N1836-A21, Nassau, Bahamas, 1 year, 12 issues, $149. Visit the web site at www.globaladvisor.com
