Is the bear rearing its head? Time will tell. Regardless, investors should have a general understanding of how bull and bear markets work.
It will take only a few minutes to learn about and this knowledge is power; not to mention quite possibly money in your pocket. Investors who understand the markets are more successful at leveling out their emotions of investing, and keeping perspective.
As a general rule of thumb, a bull market represents positive growth greater than 15% which lasts more than 3 months. On the opposite end, a bear market typically represents a loss of over -15% which lasts more than 3 months.* So, by this definition, you never truly know you are in a bear or bull market until you are already in it. *Source: Mackenzie Investments (Bloomberg: month-end data points as at December 31, 2015; total return, local currency)
History can teach us a lot about these market trends. While each bear and bull market is unique from another there are a few trends we can see.
The graph below, courtesy of TD Asset Management shows Canadian bull-bear cycles based on the S&P/TSX Consumer Price Index from 1985 – 2014.
The Power of Staying Invested - Canadian Bull-Bear Market Cycles: January 1985 - December 2014
As history of the markets has demonstrated, during previous bear markets, Canadian Equities eventually recovered and resumed their upward trend. That's why it's important to remain focused on your long-term investment objectives and consider staying invested to allow your portfolio the opportunity to participate in any upward market moves. As you can see in the chart below, investor who attempt to time the market or sell during bear markets, may miss out on significant returns during prolonged recovery periods and bull markets.
If we combine the statistics from the S&P from 1956 – 2015 and the S&P/TSX from 1985 – 2014 we can see the average bull market lasts about 34 - 51 months, while in contrast, the average bear market lasts only about 7 - 14 months.
Despite the fact that the typical bear market is significantly shorter, it can feel longer – much longer, to the investor watching his or her statement values go down. Even though investors spend less time in bear markets, they remember them more because declining markets instill fear.
It is normal for investors to have a range of emotions over the course of their investment horizon, but never are these emotions more prevalent, or uncomfortable than during a bear market.
The illustration below from TD Asset Management outlines how easy it is for an investor to lose faith in their own financial decisions at the lower curve of the bear market.
The Rise and Fall of Emotional Investing
Have you ever felt a thrill from purchasing a new investment? You begin with high hopes for the future, but as time draws on, the peaks and valleys that your investment undergoes as a result of normal market movements make you uncomfortable. Occassionally, your discomfort leads you to sell your investment simply to regain a sense of control. If this situation sounds familiar, you are not alone. Many investors let their emotions guide their investment decisions. However, emotional investing may influence us to buy and sell at inopportune times and eventually lose faith in our own financial decisions.
Jill Schlesinger, Business Analyst at CBS News recently wrote, Will Stock Correction Lead to Bear Market?, and captured this investor sentiment quite well. An excerpt from her post reads:
“Although some investors may be tempted to sell, they do so at their own peril. Market timing requires you to make two precise decisions, when to sell and then when to buy back in, something that is nearly impossible. The data show that when investors react, they generally make the wrong decision, which explains why the average investor has earned half of what they would have earned by buying and holding an S&P index fund.
The best way to avoid falling into the trap of letting your emotions dictate your investment decisions is to remember that you’re a long-term investor, who doesn’t have all of your eggs in one basket. Try to adhere to a diversified portfolio strategy, based on your goals, risk tolerance and time horizon –one that is not reactive to short-term market conditions, because over the long term, it works. It’s not easy to do, but sometimes the best action is NO ACTION.”
Investors need to keep a level head during these times, so they can stay the course during these challenging markets.
This 3 minute video clip creatively uses graphics and Time Magazine covers through history to track a $1 investment in the US stock market over the years. It's a great reminder to investors of the long term trend, and consistent rise and fall of the markets.
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Stephanie Farrow, B.A., CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial planning column for local business magazine Elgin This Month since 2010. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc. About our Farrow Financial Team.