We’re going on a bear hunt, we’re going to catch a big one

Recently when reading the much loved children’s book to my middle daughter Martha for what seems like the 500th time it got me thinking about friends who have recently told me they are not going to invest capital at the present time as they feel there is due to be a market correction – or a ‘bear in the market’ for want of a better phrase.

Much like the children on the aforementioned bear hunt when it comes to markets, investors like to follow straightforward rules. Just as the children theorised when finding natural obstacles in their way that they ‘can’t go under it, can’t go over it, so they will have to go through it’ investors tend to imagine they will stay in cash and wait for a crash so that they can simply enter markets when prices are low.

However, looking at the historic ups and downs of the US stock market shows that this wait can be expensive. 

Market crashes cannot be predicted with a simple rule of thumb. Long-term savers should always start investing as soon as possible.

Investors often wait for a crash before investing, in an attempt to buy when prices are low. It’s an argument we have heard before but not one we are convinced by. To understand why let’s look at an analysis by the US asset manager First Trust. It looks at the bull and bear markets on Wall Street since 1926.

The study shows:

  • On average, a bull market lasted 8.9 years with an average cumulative return of 468 percent.
  • The highest annualised return during a bull market was 34.1 percent.
  • On average, a bear market lasted 1.4 years with an average cumulative loss of -41 percent.
  • The lowest annualised return during a bear market was -47 percent.
  • The longest bull market lasted 15.1 years and saw an increase of 936 percent.
  • The longest bear market lasted 2.8 years and saw a loss of 83 percent.
  • The current bull market has lasted 8.1 years so far and has seen an increase of 282 percent (as at 31/03/2017).
  • Four bull markets have lasted longer than the current one and have seen higher increases.

What does this mean for an investor considering entry into the capital markets?

It means, don’t wait. Just because markets have had a good run for a few years does not necessitate an immediate crash. In fact, one could have used the same logic to predict a crash one year ago and we know that investors who stayed put have earned a decent return since then. 

Half of all former bull markets lasted longer than the current one. Prices rose throughout the longest stock market boom which lasted a mighty 15 years. Anyone currently waiting for a break in the run is at risk; by standing on the side-line they could miss out on significant price increases. This risk of missing out is higher than the risk of a downturn. For your financial planning needs please contact Adam on 01603 666132.