Sooner or later, bear will be back
Could it happen again? Could your retirement plans end up in shambles, and your college savings tattered?
As the stock market repeatedly climbs to new records lately, some people want to know that they will be safe this time. They'd like to get a taste of the action in the stock market, but they want guarantees that they won't get whacked again like they were from late 2007 to March 2009 — a 57 percent hit.
If you fear a recurrence and want assurances it won't happen again, you will never get such certainty. Because the crash of 2007-09 was one of the worst in history, it's unlikely — but not impossible — that the next plunge will be as horrific. But some sort of downturn is a sure thing, even though it's not clear when or how bad it will be.
Even professional investors are very poor at predictions. When times are good, they expect the trend to continue. When times are tough, they don't imagine improvement until it's far along.
Still, analysts watch for early signs of trouble — oncoming recessions or too many people feeling like they can't lose.
When people see blue skies ahead, they naively take excessive risks buying overpriced stocks. Ultimately, that leads to a market plunge because stocks won't climb indefinitely if company profits aren't strong enough to warrant the stock prices. The downturn can be either a correction, or about a 15 percent dip in the stock market, or a bear market, a lengthy plunge of 20 percent or more.
Now, analysts are comforted because investors are still skeptical.
“If there is some good news out there, it is that a lot of the froth in the recent survey data has receded,” said Gluskin Sheff economist David Rosenberg, noting a recent poll of investors by the Association of Individual Investors. Only 31 percent said they are bullish about the market, or expecting stocks to keep rising. Their curbed enthusiasm suggests stocks can keep climbing.
Bear markets happen about every 4 1⁄2 to 5 years. The average loss in such a market is 38 percent, the Leuthold Group says.
That's unsettling, but bear markets happen only 34 percent of the time. Bull markets, which plump up 401(k)s and make investors feel good, happen 66 percent of the time.
Although people tend to think of their gains as keepers that should belong to them forever, the downturns are a natural part of investing — a result of cycles. In the cycles, exuberance fuels upturns for a while, and then stocks fall until bargain hunters show up and cause stocks to climb once again.
Since 1900, there have been 23 bear markets and, on average, investments have recovered in about 2 1⁄2 years, according to Leuthold Group research. But in the worst bear markets, like the 2007-09 one, the pain has lasted a lot longer. It was March 5, 2013, or more than five years since stocks started plunging in October 2007, before the market recovered its value.
That might be enough to scare you away from the stock market indefinitely. On the other hand, if you want to partake in climbs like the 120 percent gain since March 2009, you can hedge your bets by designing a mixture of stocks for good times and bad.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.” Readers may send her email at firstname.lastname@example.org.