Market forces are beyond the reach of anyone, and no one can dictate the precise timing of their investments.
The only thing within one’s grasp is making the most of the circumstances one finds themselves in: investing consistently from an early stage and bracing oneself for the journey ahead. It is a strategy that Jack Bogle would advocate, promoting an attitude of resilience rather than impulsive reactions, and maintaining consistency.
However, translating these principles into action isn’t an easy task. To shed light on this approach and its practical implications, this discourse will examine how this strategy has fared in the three most intense bear markets witnessed in recent times.
Banker on FIRE provides a detailed account of how an assumed investor, starting with a respectable six-figure investment, would have managed during the challenging phases of previous bear markets. This account serves as a much-needed morale booster for current investors navigating through the murky waters of the ongoing bear market.
For those embarking on their investment journey at the onset of a bear market, the situation could be a boon. With minimal investment holdings, there is minimal risk, while the potential for profit is significant due to the ability to acquire stocks at considerably reduced prices. The capacity to boost their equities portfolio significantly is an opportunity afforded to very few.
However, what about the majority of the investing populace?
The larger segment of stock market investors are not fortunate enough to begin their journey at the dawn of a bear market. They have been consistently investing over the years, amassing substantial portfolios due to diligent saving and investing, only to see their investments plummet by 20%, 40%, or even 50% within a matter of months.
Such losses cannot be offset by a mere incremental increase in the savings rate. These drops represent years, if not decades, of contributions being obliterated by the market’s downward spiral.
In the face of this year’s 20% market slump, many may wonder if this is the end of their investment journey, or if there is still a glimmer of hope on the horizon.
This exploration aims to delve into the visceral experience of a bear market’s grip, revisiting three of the most devastating bear markets in recent history. It will trace the journey of an investor who started with a $100,000 brokerage account at the onset of each bear market and continued contributing $500 monthly ($6,000 annually) throughout the bear market.
The first part of this retrospective journey commences in 2008, a year marred by one of the most drastic stock market declines ever recorded. From January to December, the financial crisis almost brought down the global economy, leading to a total decline of 37% in the S&P 500. As a result, an investor with a starting balance of $100,000 would have finished the year with just $67,000, even after adding $6,000 to their investment. A truly catastrophic year.
Nonetheless, as everyone is aware, the subsequent 13 years have been relatively calm. The most severe dip was a 4.4% decline in 2018, a mild hiccup in comparison to the current market situation. By the beginning of this year, the same investor would be sitting on an impressive $716,000 portfolio. Despite the 20% hit in the following six months, bringing their total down to $578,000, their overall annualized return from January 1, 2008, to June 30, 2022, is a respectable 9.7%.
Next, the chronicle rewinds to January 2000, when investors were high on the dot-com bubble, oblivious to the imminent market crash. The subsequent three years saw continuous market declines, with the S&P falling 9% in 2000, 12% in 2001, and a further 22% in 2002. After three years of consistent $6,000 contributions, the initial $100,000 investment was worth a mere $75,000 by December 2003. The portfolio, however, recovered to a value over $1,000,000 by January 2022, and despite this year’s market plunge, sat at approximately $847,000, reflecting an annualized return of 7.4%.
The final flashback in this narrative takes us to January 1973. This investor experienced a brutal introduction to the market with a 15% decline in 1973 and a 26% decline in 1974, reducing their $100,000 investment to around $70,000. However, the subsequent years were largely prosperous, with the market recording only three annual declines over the next 25 years. By January 2000, after contributing a total of $262,000, their portfolio would be worth over $6,000,000. Even with a significant market crash in the subsequent years, reducing their portfolio value to $3.8 million, their annualized return sat at a healthy 11.2%.
Current investors likely fall into one of three categories: those just beginning their journey, those lucky few who cashed out in January 2022, and the majority who have significant portfolios and have suffered substantial losses. No matter the category, it’s vital to remember that while fortune may favor the bold, the stock market rewards the patient. In the face of the bear market, it’s a matter of resilience, strategic planning, and continued investment.
Thank you for your time and happy investing!