Trading apps such as Robinhood Markets Inc. introduced millions of investors to the stock market during the pandemic, and many of them are experiencing a bear market for the first time. I suspect they have already learned some valuable lessons, notably that picking stocks is much more difficult in a down market. I’m reminded of others I learned as a business student and later experienced during my first bear market, the long and painful dot-com bust from 2000 to 2002.
Foremost among them is that although it’s reasonable to expect the market to rise over time, no one knows what it will do in the short term. Naturally, people want guidance during a downturn; they want to know when their investment accounts will stop shrinking. The financial industry knows this, so it parades out its prognosticators to tell the public how low stocks will go and how long the bear market will last.
Let me save you some time and disappointment: These would-be oracles have no idea where the market is going. Worse, most of them know there’s no way to anticipate markets’ moves. But they can’t resist the opportunity to promote their firms and themselves because they also know that nothing grabs investors’ attention like a declining market.
Still, bear markets do end eventually, even if it never feels that way at the time. There have been 12 bear markets since 1945, generally defined as a stock market decline of 20% or more from the previous high. Their average duration was about a year from peak to trough. Some, including the dot-com bust, were closer to two years. The big outlier was the Great Depression, which coincided with a wave of bear markets throughout the 1930s.
The fact that no one knows when a bear market will end is one reason it’s a mistake to put off investing or pull money out of the market. Compounding the problem, stocks tend to surge at the start of a new bull market. So by the time it’s obvious that the bear market is over, a big chunk of the gains is already in the books.
As a result, those who aren’t invested when the bear market ends are invariably forced to buy at higher prices — and in some cases higher than the price at which they sold previously. A better approach is to keep buying at regular intervals throughout a bear market. That way, as prices decline, so does the average cost of purchases along the way, resulting in bigger gains when the market finally turns higher.
Bear markets are also a good reminder that no stock is a sure bet. Companies are more closely scrutinized during prolonged downturns, which often reveals and topples those that are dealing dishonestly. Perhaps the best-known examples from the dot-com bust are the energy giant Enron Corp. and the telecom behemoth WorldCom Inc., both of which were wiped out when their accounting shenanigans came to light.
It’s hard to convey to someone who wasn’t around at the time just how mighty both companies seemed before they collapsed suddenly. The closest I can come is to point out that at the end of 1999, WorldCom was among the largest 20 US companies by market value and that several months later, Enron broke into the top 60. Today, that would be like Home Depot Inc. or CVS Health Corp. disappearing overnight.
Other companies never regain their former glory after a bear market. General Electric Co. was the most highly valued US company in 2000. I remember people saying at the time that it was the only stock anyone needed to own. Today GE isn’t even in the top 100, and it’s weighting in the S&P 500 Index is a rounding error. Investors who bought GE in 2000 lost about 70% of their money through June, and that includes the dividends the company paid along the way. Betting everything or even mostly on GE turned out to be a terrifically bad idea.
Nor is it guaranteed that a stock will reclaim its pre-bear market high. Netflix Inc. is down about 70% from its 52-week high of $700 a share. It may never reach that level again. Just because some investors paid more for Netflix than it’s now worth doesn’t mean the market is obliged to return to that price.
An easy way around these problems is to own the entire stock market. Companies and bear markets have come and gone, and still the S&P 500 has returned roughly 10% a year during the past 150 years, including dividends. S&P 500 funds are widely available, as are funds that track the full US stock market or global stock market, and many have minimal fees.
Amid all the unknowns, one thing is clear: Investors are most likely to succeed when they invest regularly in low-cost funds that track broad markets and ignore everything else. That’s never more important — or profitable — than during a bear market.
