Every long-term investor with more than 12 years of experience knows the definition of a bear market (a 20% drop from its most recent high). But what about the investors who have less than 12 years of experience? (12 years ago is when we last experienced a meaningful bear market) Well, they are getting their first taste of what a bear market feels like and quickly discovering that they're no fun. Many of today's investors have only recently started to invest, having begun only after the 2008-2009 Great Recession, so it’s not surprising that they are beginning to question their future potential investment success.
What does surprise me? Seeing some long-term investors with decades of experience becoming increasingly skittish about their future. But why would they be skittish? Investors with more than a decade of investment experience should know how this bear market ends (They know that it ends with the start of another bull market). Experience tells them that equity prices drop in a bear market until they don't.
Just take a look at the equity market drops of some previous bear markets, paying particular attention to the number of days spent in the bear market:
Why be nervous when you know that a bull market has followed every bear market in history? I mean, why panic about a bear market when history tells us that bear markets present some of the most significant opportunities to acquire great companies at great prices?
Because investors may be overlooking one crucial emotional characteristic of a bear market: The Length of a Bear Market. The length of a bear market can fracture even the most confident investor.
Since its' been over 12 years since the last bear market, maybe the investment senses have become dull. Seemingly, investors have forgotten that bear markets can last years rather than days. Perhaps that's why investors are on edge today. Investors get bombarded with headlines that focus on percentages rather than the length of a bear market. Time spent in a bear market may be the most brutal hammer to drop on an investor's psyche.
History tells us that the average bear market lasts a shade over 11 months, just take a look at this chart by First Trust:
Here we sit in October of 2022, and we are now entering the 10th month of this bear market. Does this mean that this nightmare may last longer?
After talking with several dozen clients, I sense that the crush of TIME that we've spent in this bear market is starting to weigh heavily on their resolve, even more than the percentages.
The remarkable thing about this bear market is that should it end today, it would be merely a blip in history. In other words, at this point, this bear market is just average. Barely worth the consideration of discussion in the annals of history. Yet, it certainly doesn't feel that way. It never does when you're in the vortex of a bear market.
I know that the bear market will continue until investors believe that the future will look better than the past and that innovation and the dynamism of our economy will eventually prevail. And that when investors believe again that businesses will continue to earn more money and return more capital to their shareholders. Then and only then will the light be seen at the end of this bear market tunnel.
Until then, Stay the course, my friends