Stoic investors may have shrugged off 2022′s declines, but what if the pain extends into 2023 and beyond?
Are investors prepared for an extended bear market? The question was posed last week by Bloomberg’s Nir Kaissar, who noted most bear markets over the past 20 years have been quite brief.
The S&P 500 tanked 35 per cent when the pandemic struck but bottomed within 33 days. It fell 20 per cent in late 2018 but the pain was over within three months. 2011′s 19 per cent fall took place over five months. Stocks collapsed during the financial crisis but the worst was over within 18 months.
“It’s easy to underestimate the torment of an extended bear market if you’ve never encountered one,” says Kaissar, who points to the “excruciating” 31-month bear market that exhausted investors following the 2000 dotcom crash. Market declines can certainly be extended affairs. However, they don’t have to be “excruciating”.
Warren Buffett once asked: if you plan to eat hamburgers throughout your life, should you wish for higher or lower beef prices? This was followed by another question: if you will be a saver during the next five years, should you hope for a higher or lower stock market?
Many investors get this wrong, noted Buffett. Even though they will be buying stocks for years to come, they are “elated” when prices rise and “depressed when they fall”. Effectively, “they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying”.
Falling prices are bad for investors nearing retirement or for those who plan on selling any time soon. For most ordinary investors, however, lower stock prices are equivalent to cheaper hamburgers.
