The importance of maintaining perspective

by Andrew Newman
in Investing
9 Jun 2009 | 0 Comments

Fact - the average investor should expect to experience 8 bear markets over 40 years of investing.

Fact - the average investor should expect to experience 6 bear markets over a 30 year retirement.

When you're living through a bear market, it's easy to think when all is said and done, that it will hold a unique spot in market history. The truth is, over the course of time, bear markets have occurred with frequency and regularity. As the table below illustrates, stock prices have suffered double-digit declines about once every five years. Including the current downturn, there have been 11 bear markets since the end of World War II, lasting an average of 15 months and generating an average decline of 29%. These bear markets may seem like ancient history but like today's bear market, they weren't easy to endure at the time.

Compounding the investor experience is the fact that the current bear market is taking place at the same time that the US economy and other economies around the world have fallen into a deep recession. What's important to remember is that this, too, is a familiar scenario in market history. Since World War II, 8 out of 11 bear markets have been accompanied by recessions.

The table below shows the S&P 500 Index bear market cumulative returns since World War II.

S&P 500 Index bear market cumulative returns

Notes:

* S&P 500 peaked at 1580 in October 2007 and reached a low of 659 in March 2009. This 58% decline over 18 months works out to be approximately 44.2% annualised.

Dividends and distributions are reinvested.

Average bear market decline is 29%.

Average bear market duration is 15 months.

Waiting on the sidelines means you might be less likely to benefit fully from a market recovery. Many investors react to downturns by pulling out of the market altogether, with the intention of getting back in to benefit from market recoveries. In fact, stock market trends can turn on a dime, making investors' attempts to time the market virtually certain to fail.

Follow a consistent strategy whatever market you are in. Investors face a constant barrage testing the strength of their discipline, including the negative views expressed by market prognosticators and financial news channels. But history has tended to reward those with the fortitude to remain invested through a crisis, while those who have made emotional decisions based on short-term volatility have paid the price.

Successful long-term investors tend to follow several time-tested principles, which help them achieve their goals:

They look beyond the rear-view mirror, to make a long-term plan that's in line with their time horizon and risk tolerance. They then stay the course, resisting the temptation to shift assets based on the market's twists and turns.
They review their portfolios regularly and rebalance when their asset mix falls out of line with their goals.
They invest in an actively managed, globally diversified portfolio of assets that seeks to limit losses and provides smoother returns by adjusting asset allocations in response to changing market conditions
They work with a Financial Adviser who focuses on risk management to help them build and preserve their wealth.

The above article has been sourced from UBS Global Asset Management (Australia) Ltd.

Important Information

The information provided is general in nature and does not constitute financial advice. While we have taken reasonable care in providing this information, it should not be construed as being specific to your investment objectives, financial situation or particular needs. It's important for you to consider these matters before making any financial decision and we recommend you seek financial advice.

The importance of maintaining perspective

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