We’re going on a bear hunt

During the COVID-19 crisis there’s been a lot of talk and commentary about whether there will be another market sell off.

The professionals (certainly not me) make a good argument why it should happen. And it’s easy to go along with them, but the next sell off hasn’t happened despite all the terrible news coming out.

Markets won’t budge with any negative news, they just keep climbing higher.

I’m not complaining, my portfolio is coming back from the lows and I’ll take that.

Of course, it would be nice to keep buying at lower prices.

For some people it must feel like they’re pounding sand trying to tell us “It must go down”.

And it might just go back down… eventually, but who knows.

How low could it go? Again, no one knows. But the odds of a deep sell off happening will probably surprise you.

The crash

The market crash that happened throughout February and March 2020 was so quick and severe, that most investors and market participants (including myself) became biased and started to believe there was more selling to come.

Every day there was more news of heavy selling, record days of percentage declines and trading halts in the American markets. Australia even considered implementing a total market trading halt.

Prices just getting pushed lower and lower. Honestly it began to feel like there was no end in sight.

However, there was an end to it. In that moment though on March 23 it sure felt like the selling wasn’t going to stop.

This Coronavirus pandemic is crippling worldwide economies like never before seen so it only has to get worse… right?

I started doing some reading after I heard some stats about bear markets, the biggest market declines and how often it happens. I was very surprised at how rare a market sell off of more than 50% actually is.

50% seems to be the current benchmark for market declines everyone’s measuring this bear market against.

For investors who invest in index ETF’s or diversified LIC’s we’re expecting returns in line with the market averages, so these declines can have a direct affect on our portfolios. Individual companies will usually sell off even more in a bear market, so the average market declines won’t apply to them.

Anyways, what about those market sell offs and how low does it normally go?

Some bear market stats

Here’s a list of all the bear markets in Australian stock market history since 1900. (This list makes up technical bear markets that have sold off 20% or more that haven’t fully reversed in 12 months).

 

 

Source: Dr Shane Oliver AMP Capital

 

The technical term for a bear market is a 20% decline. And since 1900 we’ve had 18 bear markets of a 20% decline or more. In 120 years the Australian stock market has had a total decline of 20% or more only 18 times… just let that sink in for a minute.

Out of those 18 bear markets, 4 have been between 30% and 40%, 2 have been between 40% and 50% and 3 have been between 50% and 60%. Out of 120 years there’s only been 9 bear markets with a decline of 30% to 60%. Only 9 times!

From 1900 we’ve only had 3 times in Australian stock market history where we’ve dropped more then 50%. For more perspective, there’s only a 2.5% chance of having a decline of more than 50%.

The market reached a low of 35% on March 23, if we had closed the year out there there that would have only been the 5th time in history we’ve closed at that type of decline.

So now we know the chances of getting to 50% are pretty damn slim.

Taking a look at the overall average from 1900 it seems we could expect about a 32% decline in a bear market.

But averages get skewed because of higher numbers. If I take out all the declines of 50% the average bear market is about 27%.

That’s just manipulation and we have no idea what the market will do. I think an expectation of 20% to 32% is a good figure for the average bear market.

And look, I know that’s a wide margin but we really have no idea where the bottom will ever be.

If it goes lower then 30% then we know we’re probably witnessing some kind of historical event. And hopefully we have the cash handy to buy at lower prices.

What does this data mean for index investors?

All this data is talking about an entire stock market decline, like the ASX200 falling more than 50%.

How does this affect an investor who buys an index tracking ETF?

Well, if you bought VAS which tracks the ASX300 and the ASX300 fell 50% you can expect your portfolio to decline by half.

As an example, you invest $5k and the 50% decline happened your portfolio would now be worth $2500. Give or take a few percent.

You shouldn’t let that deter you though, it’s only a real loss once you’ve sold. If the entire stock market index became non-existent, I’d be more worried about humanity than my loot.

What to do with this information… absolutely nothing!

Since I can’t time the market there’s nothing really I can do with the information except stick to my strategy.

My core strategy is to dollar cost average into the market at set periods of time. Like most passive investors, I’ll just continue to do this regardless of where the market is. The information is a good reminder that from time to time we’ll experience volatility.

When we experience that volatility it’ll feel like it’s never going to end, it might even feel like it’s never happened before.

As investors we need to go through the volatility to receive those battle scars.

There’s no substitute for experience, and we have to go through the process of buying while the world is crashing around us. We’ll come out the other side stronger and ready for the next one.

Remember, even after all those periods of volatility the market just keeps rising steadily overtime.

Will the market sell off more?

Seems to be the question everyone is asking.

And I’ll be honest I have absolutely NO idea, I’d be very weary of anyone who’s 100% convinced they know. Why do you think even the best investors always finish off with “I could be completely wrong” because even they aren’t sure.

The stock market has been rallying since those March 23 lows, making it’s way out of that illusive 20% bear market territory. It’s anyone guess where the market will finish at the end of 2020.

Do you think we’re in for a bumpy ride with market going to sell off more? Let me know in the comments below.

 

 

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