The questions on the minds of most investors is: When will the stock market bounce? and Is this the beginning of a more severe downturn? Several blogs ago, I covered the signs and typical archetype of a stock market top. While we are seeing similar characteristics today, the major challenge for active investors is separating a normal pullback in a bull market from a bear market, which is only obvious in hindsight. For more than forty years, buy and hold investors have been rewarded by buying the dips. However, as many investors enter the deaccumulation phase and begin drawing down their assets in retirement, will they be comfortable holding on during the next inevitable bear market?
At this point in time, the 56.78% peak to trough draw down the S&P 500 experienced during the global financial crisis seems like a nightmare from another time. Yet history shows bear markets occur with regular frequency. In fact, over the last 97 years, there have been 12 drawdowns greater than 20% occurring about once every eight years. The maximum drawdown numbers in the table below would likely appear larger to many investors as they are based on daily historical data rather than the month end numbers that most articles cite which can obscure the true investor experience.
Bloomberg: S&P 500 Daily Data
Yet perhaps of more concern to investors should be the length of time required to recover their capital in the inevitable future bear market in stocks. Long forgotten is the more than 5 years it took investors to recoup their capital following the global financial crisis and more than 7 years following the tech bubble let alone the nearly 25 years it took following the stock market crash in 1929. In addition, one must keep in mind that these recovery periods are nominal in nature and do not reflect the impact of inflation.
Having managed portfolios during four of the last fourteen bear markets illustrated in the chart above, we have always believed in a proactive and disciplined approach to investing. Reading numbers in tables is one thing, experiencing them with your life savings while drawing down in retirement is altogether different. There may be no better time than now to review the risks one is taking within their investment portfolio.
In a future blog post, we’ll review the length and severity of past drawdowns accounting for inflation, which can dramatically extend recovery periods and inhibit purchasing power particularly in periods of elevated inflation.