Bear Markets Test Investor Patience

Investors rang in the 2021-2022 New Year on a high note, with the S&P 500 index almost reaching 4,800. With an assist from soaring home prices, U.S. household net worth soared to levels never seen before.

Then the bear market arrived in 2022, and almost a year and a half later, the stock market is still about 15% away from eclipsing its all-time high set in December 2021. The thought of reaching a new peak may feel like a far-off possibility, and many investors may see this market weakness as lasting an unusually long time.(1)

But history reminds us that it’s very normal.

Here’s a look at the last five major bear markets (including 2022), and the number of days it took for the stock market to go from one peak to the next:

The pandemic-driven bear market of 2020 marked the fastest round trip (181 days) to a new peak since 1950, but I think we can classify it as an outlier given the circumstances. Beyond that bear market, the shortest amount of time it took for the market to get back to a previous peak happened in 1950, when it took 436 days. Consider that since 1950, the average number of days it took the stock market to return to a peak is 1,166 – or over three years.

That’s a long time.

During these long stretches of time, investors are prone to lose patience, which can lead to a number of mistakes that compromise returns over time. The economist Richard Thaler – who received the Nobel Memorial Prize in Economic Sciences in 2017 – refers to one of the effects on investors as “myopic loss aversion.”

Loss aversion says that investors dislike losses about twice as much as they appreciate gains, while the myopia of checking our investments too often only serves to amplify the impact of loss aversion. Given that it usually takes years for the stock market to return to a previous peak following a bear market, investors are forced to spend a lot of time trying to contain – and hopefully avoid – myopic loss aversion.

It can be easy to lose patience during this time, which sometimes results in investors deciding to change their asset allocation, or perhaps even making sizable bets on risky stocks or asset classes – in hopes of speeding up the return to previous peaks. These decisions are almost always mistakes made at just the wrong time.

Bottom Line for Investors

Since 1950, bear markets have lasted an average of 381 days. At the time of publication of this column, it has been 460 days since the stock market peak on January 3, 2022. I mentioned previously that the average number of days it has taken for the stock market to go from ‘peak to peak’ is 1,166.

But it’s important for readers to keep this in mind: the market spends the majority of the ‘peak to peak’ time climbing back up to historic levels. In other words, remember that the bear market doesn’t last an average of 1,166 days, the round trip does. And therein lies the real harm of myopic loss aversion: as investors grow frustrated at the long time it takes the market to get back to a peak, it sometimes results in shifting strategies in the early stages of a new bull market – which is precisely the wrong time to do so.

1 A Wealth of Common Sense. March 28, 2023. https://awealthofcommonsense.com/2023/03/why-the-stock-market-makes-you-feel-bad-all-the-time/

2 A Wealth of Common Sense. March 28, 2023. https://awealthofcommonsense.com/2023/03/why-the-stock-market-makes-you-feel-bad-all-the-time/

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