Nature of bear markets

(source: Globe Investor magazine, December 18, 2008.)

Cool pic. Anyway, Globe Investor magazine, the Globe & Mail's insert, has a brief summary, written by Dan Hallett, on the nature of bear markets. Unfortunately, the attached table is very small and hard to read on high-resolution monitors. In any case, here are the key points he makes:

1. Bear markets are common.

Canada has seen six bear markets in the last 39 years. That’s one every 6.5 years or so. The accompanying table shows that U.S. stocks have seen 15 bear markets over the last 137 years – an average of one every nine years.

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2. Clustered bear markets are the norm.

...Notice that many past bear markets started shortly after stocks fully recovered from the previous decline. Most investors’ experience has, until this year, been the exception to the notion of clustered bear markets. The crash of 1987 was fully recovered by the summer of 1989. After that, the United States didn’t have a real bear market until 2000.

3. This bear market started in 2000.

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4. Diversification can save your ass(ets).

Even if you can see a bear market coming, there are always surprises...

The best place to hide has been in government cash and bonds. In the Great Depression, for instance, U.S. stocks fell nearly 90 per cent and spent 15 years under water. But a portfolio of 60 per cent U.S. stocks and 40 per cent U.S. government bonds spent just over six years in the red. There are two reasons for this.

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5. This bear will hibernate again.

The average U.S. bear market spent nearly three years recovering from its lows. This bear market is worse than average and the race downward has been much faster than a typical bear decline.