Buying a bear market: What’s your hurry?
So, is it time to buy? Was June the bottom? Did investors miss their chance?
If history is any guide, this is one party where it may be ok to show up fashionably late.
The S&P 500 entered a ‘bear market’ in June, having fallen more than 20% from its highs. Some pockets of the market fared better, others worse.
Small caps and growth stocks[1] lost over 30% of their value. Energy stocks, on the other hand, performed very well as oil and gas prices moved higher.
Bonds didn’t offer much help. Rising rates pushed high quality bond prices lower while fears over recession and economic growth brought lower-rated corporate bond prices down. Generally speaking, the first half of 2022 was tough for investors.
Losing money is no fun. For long-term investors with money to invest, the silver lining to lower prices is lower prices. Who doesn’t love an opportunity to buy lower?
We looked at data from four previous bear markets[2] – 1974, 1987, 2002, and 2008. It’s important to note each of these bear markets was caused by its own unique set of circumstances. The reasons are always different, and usually only clear in hindsight. Still, perhaps there’s something to be learned.
Let’s assume we aren’t smart enough or lucky enough to pick the exact market bottom (we aren’t), should investors prefer to buy stocks six months before or after the market bottoms?
In each case, investors were better off buying late. The table below shows returns for each of these four periods.
Missing the first six months of a recovery isn’t exactly easy, either. When the market bounces off the bottom, the initial move higher can be violent. See the chart below. In 1974 and 2008, investors would have missed 32% and 51%, respectively, by waiting. And that doesn’t include dividends.
Source: Divvi Wealth Management, Morningstar Direct
Timing the market is hard and we certainly aren’t suggesting people try. That said, if you still have a pile of money earmarked for the stock market but have yet to pull the trigger, don’t sweat it. Create a plan to reinvest that works for you, one that’s aligned with your long-term goals.
And if possible, invest regularly, as part of an automated plan, to eliminate these types of decisions altogether.
Interested? Reach out to DIVVI to continue the conversation.
Opinions expressed herein are solely those of Divvi Wealth Management and our editorial staff. The information contained in this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
[1] Using the Russell 2000 Index to represent small cap stocks and the Russell 3000 Growth Index to represent growth stocks.
[2] The bear market from early 2020 was excluded, primarily because we don’t have 10 years of data following the trough. It was also unique due to length, fiscal and monetary response, and pace of recovery.
