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What Does a Bear Market Really Mean for Your Portfolio?

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Two years ago, a global coronavirus pandemic spurred what became one of the shortest bear markets in modern financial times. Now, a policy pivot to hike interest rates by the U.S. Federal Reserve and signals of slowing economic growth have pushed major indexes to fall by more than 20%. 

Given such a backdrop, we thought it might be instructive to review what a bear market really means for investors.

A common definition of a bear market is a drop by 20% or more from a previous peak. By contrast, a correction — when a key index falls 10% plus — is a less dramatic and more frequent occurrence in stock markets.

Excluding the most recent 20% downturn, which hit last month, the table below shows the 15 bear markets since mid-1926 as captured in the Fama/French Total US Market Research Index. Listed are the benchmark's total returns in subsequent one-, three-, five- and 10-year periods following each bear's trough. For example, after the Covid-19 pandemic spurred a downturn beginning in late February 2020, the index dropped 34.30% in 23 days. From such a low, the index rose over the next 12 months to produce a total return of 87%. 

Overall, all 15 bear markets during this 95-plus year period turned positive within a year. Also notice:

  • Three years later, 100% of the bears (14 of 14) were still on positive ground.
  • Five years after reaching a trough, all of the identified bears (13 of 13) remained in the plus column.
  • Ten years later, 100% (13 of 13) were in the black.

Even if you look at average returns of one-, three- and five-year periods after stock downturns of various magnitudes, the same patterns persist. The chart below compiles data from the Fama/French index from mid-1926 through 2021. It breaks down that benchmark's average cumulative total return by: corrections of 10%; bear market drops of 20%; and more severe bears in which domestic stocks fell by 30%-plus.

As you can see, in each instance investors who bailed on stocks would've risked missing the subsequent strong rebounds. Also worth noting: The average return for the five-year period after declines of 10% was 9.54%; after 20% declines it was 9.66%. Both were close to the historical average return of 9.80% over this entire timeframe. 

Let's put current events into a 'big picture' perspective. That is: Unlike bear market numbers, which are based on lagging indicators, the stock market is forward looking. By the time bear market predictions start dominating financial news headlines, your portfolio has already experienced a drop in value as new information about interest rates, inflation and geopolitical events is reflected in current security prices.

Risk management is an ongoing concern for IFA's investment committee. At IFA, our wealth advisors like to warn their clients that stock returns are volatile and unpredictable. You can control, however, how you react. The future is uncertain. Fortunately, lessons learned from the past should bring comfort to those who stick to a strategic and holistic investment plan.


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.