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How long does it take to earn your money back after a bear market
By ATB Investment Management Inc. 2 April 2020 5 min read
What is going on in the markets?
This has been a tough year for investors and humanity. Rumblings of Coronavirus or COVID-19 first began in January and at the time, few thought it would escalate to where we are today.
As we witness some panic buying at the grocery store, we are seeing some panic-selling in the stock market. We know now is not the time to sell, but it is difficult not to be scared when we see frequent market declines.
The worst thing to say to someone with anxiety is to “calm down” and yet that is often the advice we hear from finance professionals. While the advice may seem unrealistic when our emotions are running high, there is a reason for it. Although, perhaps the better advice is to take a few deep breaths, and remember why you wanted to invest in the first place.
Historical recovery from bear markets
A bear market is when the market experiences a price decline of 20 per cent or more over a period of time, often accompanied by investor fear and negative sentiment. And, when we enter a bear market, the natural question is often “when will this all be over”.
The truth is, nobody knows with conviction when this will all be over. The only thing we know with relative certainty is that it will eventually end. We will be allowed to go back to work, attend large gatherings, and the stock market will end this rollercoaster ride.
March marks the end of the first quarter of 2020 and also represents the first quarterly investment statements of the year. Most statements are going to show negative performance which is hard to stomach on top of everything else. Some investors may not even open their statements, as they recognize that they don’t need this money for the next 10 or more years. Others will open the statements and feel a flood of emotions.
Although we don’t know when this will end, we can look at what history tells us happens in the stock market following significant drawdowns.
How long does it take to breakeven?
Seeing how markets have recovered from the data above might create some comfort as we navigate this unknown. The above chart comes from an article written by Ben Carlson on his blog, A Wealth of Common Sense. It outlines the last 24 bear markets observed in the S&P 500 (Index periods with declines of 20% or more) since 1928.
For each bear market period, it outlines the date markets hit their peak (market high) and trough (market bottom), along with the percentage drawdown that occurred between the peak and trough. The last two columns show how long it took, in months and years, for an investor to earn their money back. Half the time, it took less than a year for an investor to breakeven. There are obvious outliers that occurred, but in general, markets seemed to recover quicker than maybe one would have guessed.
Investing examples from the 2008 bear market
What would staying invested looked like vs. moving to cash (GICs)? Let’s take a look at how an investor would have done in various scenarios coming out of the last major bear market that occurred in 2008/09.
October 2008 financial crisis
October was likely the biggest period of uncertainty during the 2008 financial crisis. At the time, two major financial institutions, Lehman Brothers and Washington Mutual (Wamu) had collapsed, a global central bank effort had just been unveiled and several bailouts had been approved.
This was peak panic for most investors, and rightfully so as things looked pretty grim. However, if we look at the table below, all Compass Portfolios, from our most conservative on the left to our all equity portfolio on the right, offered far more than a GIC or cash return. We can also see that the equity heavy portfolios on the right, the ones that were already down 35% at the start of our observation period, ended up performing the best.
During the time period beginning October 2008, GICs for a one-year term would have been priced to earn around 4%.
Compass series A index & GIC values from Oct 10, 2008 to Oct 9, 2009
March 2009 financial crises bottom
In March of 2009, we continued to see equity markets sell-off as poor economic data poured in. Markets bottomed on March 9th of that year, with the lowest stock market point during the 2008/09 financial crises.
However, looking at the below table, from March 9, 2009 to March 9, 2010, all Compass Portfolios rebounded with our Compass Max Growth series A (all equity mandate) up nearly 50%. A one-year GIC at this time would have paid around 2%.
With perfect hindsight and our emotions off the table, we can see that the best outcome to the last major bear market scenarios was staying invested. Had an investor sold their portfolio to move to cash, it would have meant leaving wealth on the table in the form of strong returns.
In this one year scenario from the market bottom to a year later, if an investor had moved to cash/GICs as opposed to continuing to hold the Compass Balanced A series, they would have $164,000 less in their investment portfolio today (based on $500,000 invested and not accounting for any taxes paid on the growth.)
Compass series A index values from March 9, 2009 to March 9, 2010
In addition to the returns on the table above, the Compass Conservative series A also returned 14% by August 4, 2009, hitting new highs less than 5 months after hitting bottom. Compass Conservative Balanced series A wasn’t far behind making new highs after just six months from hitting the bottom and, as of Sept 15, 2009, made back 24.1%.
With equity prices falling across all sectors, there is an opportunity for the patient investor that stays the course. Looking out at the next few years, sharp and broad sell-offs, such as what we have experienced in March of this year, generally bode well for future returns. A diversified and disciplined investor can see the same benefits we witnessed coming out of the 2008/09 great financial crisis with a little bit of patience and a focus on the long-term.
We are all in this together and we encourage you to reach out to your advisor if you need to chat. If you don’t have an advisor, contact us or call 1-888-282-3863 to chat with one of our ATB Wealth professionals. Remember, we have been through this before, and we will get through it again.
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This report has been prepared by ATB Investment Management Inc. (“ATBIM”) which manages the Compass Portfolios and ATBIS Pools. ATBIM, ATB Securities Inc. (“ATBSI”), and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Wealth. ATBSI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF).
The mutual fund performance data provided assumes re-investment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that may reduce returns. Unit values of mutual funds will fluctuate and past performance may not be repeated. Mutual Funds are not insured by the Canada Deposit Insurance Corporation, nor guaranteed by ATBIM, ATBSI, ATB Financial, the province of Alberta, any other government or any government agency. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Read the fund offering documents provided before investing. The Compass Portfolios and ATBIS Pools include investments in other mutual funds. Information on these mutual funds, including the prospectus, is available on the internet at www.sedar.com.
Opinions, estimates, and projections contained herein are subject to change without notice and ATBIM does not undertake to provide updated information should a change occur. This information has been compiled or arrived at from sources believed reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. ATB Financial, ATBIM and ATBSI do not accept any liability whatsoever for any losses arising from the use of this report or its contents.
This report is not, and should not be construed as, an offer to sell or a solicitation of an offer to buy any investment. This report may not be reproduced in whole or in part; referred to in any manner whatsoever; nor may the information, opinions, and conclusions contained herein be referred to without the prior written consent of ATBIM.