Bulls and Bears, Fantasy and Reality

© Can Stock Photo Inc. / labamba

Some stock market lore is older than memory. The term “bull market” for periods of rising prices and “bear market” for falling prices may date to the inception of the London Stock Exchange, at the turn of the 17th century.

We’ve written often about the inherent volatility of the market and its cycles. Analysts at Ned Davis Research count more than thirty bull markets and thirty bear markets since 1900. The customary definition includes a minimum move of 20% up or down (for bull or bear markets, respectively.)

It is nice to think about selling out at bull market peaks and buying back in at bear market bottoms—enjoying the gains and avoiding the losses. But successful market timing is probably not possible, for many reasons:

1. The market fluctuates almost every day. Declines of 3-5-7% over three to seven weeks are commonplace, three times a year on average. Like 10% corrections, they cannot be reliably predicted, nor profitably traded.

2. By the time a bear market is confirmed by a 20% drop, most of the damage has probably happened already. It makes no sense to sell out at a low point.

3. The weight of the evidence says that people are generally most pessimistic at low points, when major gains are ahead—and most optimistic at high points, when major declines are in store. Thus most efforts to time the market reduce overall returns.

Although the idea of market timing is pretty much a fantasy, there remains a wonderful approach that has worked very well for a very long time. It can be illuminated with a simple question and answer:

Q. Remember that time the market tumbled and never recovered?
   A. Neither do I.

Shares of common stock are ownership interests in publicly traded companies—a piece of the action, so to speak. US companies operate in an economy with a remarkable record of growth over the decades.

FRED real GDP

Looking at the chart, it is kind of hard to see the wars, recessions, assassinations, bear markets and upheavals that we’ve been through. The lesson of history is that we endure.

We have no guarantees that the growth of the American economy continues, or what the future holds for any investment. Bull markets and bear markets will come and go, the economy will contract and expand, and winter will inevitably give way to spring. All of these things are beyond our control.

The thing we do control is our behavior. If we avoid the madness of crowds, the compulsion to sell at bad times or buy at peaks, we might see that patience wins. It helps to have some money in the bank, and to focus on portfolio income rather than statement values. If you live on your portfolio or hope to, it is the income that pays the bills, not the statement value. If you would like to see how this perspective can work for you, please call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.