Please... Feed the Bears [Post 3]

Who Should Read This

Young Professionals that like good news.

Why You Should Care

Bear markets tend to be rare occurrences.

What is a Bear Market?

A bear market is when an overall index, such as the S&P 500, falls by 20% or more from a recent high. Bear markets are generally seen as negative because of rising unemployment, interest rates, and anxiety in the media.

While the older generation is likely concerned for their retirement savings - and rightfully so - the younger generation of investors should be wide eyed at the opportunity. The following chart displays why the future has historically been brighter on the other side of recession.

We currently sit at closer to -15% as of 12/5/22, meaning the trough may have truly been at -25.2% or we could have seen a false bottom and the market will fall again with time. Be advised before reading further, academic evidence has consistently shown that predicting future market movements is often a fool’s game and attempting to precisely time the market can be detrimental to returns.

Figure 1.

Carlson, B. (2022, October 2). Getting long-term bullish. A Wealth of Common Sense.

*Past performance is no guarantee of future results.

*Indices are not available for direct investment and do not reflect internal fund expenses.

Viewing the far-right column, it seems the grass is greener on the other side of 10 years after a recession. Keep in mind this figure is skewed by knowing when the exact bottoms came, actual returns rarely look like this due to when funds were invested.

Why Do Bear Markets Create Abnormal Returns?

As humans, we tend to laser focus on the captivating event of the market spiraling. Headlines read selloff, crash, slide, bear market, and the worst is yet to come.

A declining market, while intimidating, can also be viewed as a positive, discount opportunity. In time, and it could be a long time, this period can turn into a window for upside potential. We know from the history of markets, invested capital tends to make money over time.

Real World Value Example

For further clarity, here’s a real-world comparison everyone can relate to.

When you check the tag on a shirt you like in the store, are you hoping the price has doubled since being on the rack? Of course not. You want that sweet, discounted price tag covering up the old one.

Good companies - offered to you as stocks or bundles of stocks (through mutual funds and ETFs) - are the shirts you want - and happen to be on sale during a down market.

“Good companies” being companies or funds backed by evidence-based research or your own definition based on due diligence.

Beginning your investing journey in a bear market and pairing it with a long investment horizon could potentially lead to a powerful upside. Please... feed the bear.