Are Bear Markets Really Nothing to Fear?

09/19/2019 6:00 am EST


Landon Whaley

Editor, Gravitational Edge

A recent report by UBS suggests that bear markets tend to end quickly and suggests investors are better off buying and holding stocks. Landon Whaley takes issue with this.

Folks, I’m a level-headed cat, not prone to having my emotions needlessly dislocated over much in life. But when I recently read the “Bear Market Guidebook” released by our friends at UBS, the rage rhino inside me reared his ugly head and made me feel like I was cycling on a cocktail of anabolic steroids in an attempt to win Mr. Olympia!

UBS is providing us with a teachable moment, and so we will use this week’s Coddiwomple and Headline Risk sections to dissect each of the three-part guidebook to make you a more informed investor.

With that said, let’s dig into part one of the guidebook sure to elevate the “Hi, welcome to Walmart” risk for retired investors around the world.

Part 1 = Guano

UBS begins by defining the characteristics of a bear market (peak-to-trough move of -20% or more) and then confirms their bullish bias by showing statistics confirming that “bear markets are rare, and over quickly.” They double down on their equity bullishness with stats claiming that since 1945 “[equities] have spent about 2/3 of the time at, or within 10% of, an all-time high.”

This last point highlights how easy it is to lie with statistics.

To get to the 2/3 number, UBS lumped the time the S&P 500 has spent at all-time highs (34%) with the time that it spends in a correction of less than 10% (32%). I don’t know about you, but if my account is down 7%, 8%, 9%, I’m not a happy camper! This lying with statistics approach also overlooks the fact that 31% of the time stocks were in a drawdown of more than 10%, an outright bear market (-20%), or recovering from their losses.

UBS may see this data as a reason to always be bullish stocks, but I see data confirming why part of our mantra is to “always remain risk-conscious.” U.S. equities are in some magnitude of a drawdown 63% of the time!

My investing career is about the pursuit of above-average, risk-adjusted, absolute returns regardless of economic or market conditions. We don’t play the “how did we perform relative to a benchmark” game, we are strictly in the “have we made money while taking an acceptable amount of risk” game. 

Drawdowns are a necessary evil in trading, but big drawdowns are entirely avoidable if you remain data-dependent, process-driven and risk-conscious. Avoiding significant drawdowns and being rooted in a time-tested process allows you to spend more than just 34% of your time minting new all-time highs in your portfolio.

Tomorrow, we’ll continue our examination of part one…

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