Quarterly Thoughts – Q2 2008

The Bear market has officially arrived, as measured by S&P 500 dropping 20% from its peak. There have been 31 bear markets since 1900, averaging one every 3 or 4 years. According to Standard and Poor’s Equity Research, we have experienced nine bear markets since 1956. They have varied in magnitude from the decline of 20% in 1990 to the drop of 48% in 1973-1974 to the plunge of 49% in 2000-2002. The average decline during these bear markets was about 31%. Some suggest that the key to determining how the market behaves during the twelve months following the onset of a bear market is whether or not the bear market is accompanied by a recession. Without a recession, the indices have historically rebounded an average of 25% over a twelve month period, but if accompanied by a recession, they have historically ended, on average, 2% lower after twelve months. Regardless, disciplined investing helps avoid panic-damage and participation in the eventual market recoveries.

These are uncomfortable times for investors, and an important test of their discipline. A typical investor, without professional guidance, might panic and get out of the market now, but would be selling on the decline and would likely miss the rising market that will inevitably follow. One must accept a certain level of risk in order to achieve long-term goals, and the stock market volatility we have experienced recently remains within the ranges one might expect for equities. One of the most important things a disciplined and prudent long-term investor does is stay the course during rocky times.