Servo Wealth's Nelson: Steady Hands Win in Bear Markets

Tuesday, 19 Aug 2014 11:22 AM

By John Morgan

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Bear markets don't happen frequently enough for investors to succeed in trying to time the market, and it's best to stay put in any event, according to Eric Nelson of Servo Wealth Management.

In Servo's monthly newsletter, Nelson took a look at the five major bear markets since the 1920s to tried to find ways to help investors weather the storm when stock continue to fall.

The good news is that the worst periods of bear markets appear to be relatively short-term phenomena.

Editor’s Note:
Retire 10 Years Earlier With These 4 Stocks

The biggest bear markets occurred from 1929 to 1932, 1937 to 1941, 1973 to 1974, 2000 to 2002 and in 2008.

"Investors have become conditioned to expect a brutal bear market every few years after livingthrough two episodes since 2000. The long-term evidence shows that this might be overly pessimistic," Nelson wrote.

He noted recent bear markets contain declines of somewhere in the neighborhood of approximately 36 percent, but that stocks generally recover in a short period of time.

Small-cap/value stock portfolios have tended not to perform well during bear markets, but balanced portfolios have tended to hold up fairly well, according to Nelson's analysis.

"As violently and unexpectedly as bear markets began, stock market reversals were equally as forceful… Average S&P 500 stock returns in the first few years following a bear market were 50 percent to 300 percent higher than their long-term averages of about 10 percent per year, offering a handsome reward for investors who stuck around to see them."

One surprising finding by Nelson was how short a time it takes for portfolios to recover after bear markets end.

"Assuming they didn't bail out before the recovery began (a big 'if'), investors recouped all of their losses in just two to four years once the bear markets ended," he explained.

"Even after the Great Depression, which saw the stock market bottom in 1932, investors who held onto their stocks were whole by 1936," Nelson added.

Think Advisor's analysis of Nelson's findings was encouraging.

Think Advisor, a site aimed at professional investment advisers, said Nelson's research shows "bear markets are a gift to investors in their accumulation phase, allowing them to supercharge their portfolios when stocks are selling at depressed prices."

"For income-dependent retirees, bear markets are to be managed rather than feared, by selling bonds and holding onto stocks to maintain cash flow until stock prices have recovered," Think Advisor noted.

Editor’s Note: Retire 10 Years Earlier With These 4 Stocks

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