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Professor Portfolio
Just How Big Is This Bear?
 by Ernie Ankrim, Ph.D.
Director, Portfolio Strategy
Russell Investment Group
August 19, 2002
They say ignorance is bliss. But usually not for long. When I talked to people about equity market risk just a few years ago, in 1998 and 1999, more than a few of them said, sure, they knew all about bear markets because they had lost 1.6% or so in 1990. If that was a bear market, in retrospect it looks more like the panda variety than what we're dealing with today.
What's Similar ...
To find a proper parallel to the market's current decline, you have to look back much further — nearly 30 years. During the bear market of 1973 and '74, stocks were battered on one front by the quadrupling of oil prices over a short time, on another front by "stagflation" (rising inflation at a time of economic stagnation), and on yet another front by the Watergate scandal.
The current bear market has gotten its teeth from similarly large-scale concerns, including the repercussions of September 11 and the rash of corporate accounting scandals and bankruptcies. With these issues overshadowing corporate fundamentals and undermining investors' confidence, the US stock market has indeed been weaker than it's been for decades.
Just how weak? Over two years ending July 22, the US equity market (as represented by the S&P 500® Index) had an average annual return of -21.66%. By comparison, the S&P 500 had an average annual return of -21.45% from January 1973 through September 1974. So the magnitude of the market's recent decline has, in fact, been about as serious as it was in what many people think of as "the big bad bear market of '73 and '74."
And What's Not
A significant difference between now and then, however, is that the bear market of 1973-74 followed a period in which equities hadn't been that strong to begin with. In the 10-year period ending in September 1974, the S&P 500 produced an average annual return of just 0.49%.
The past 10 years have been a much different story. Despite the market's dismal returns over the past two years, the previous eight years were so strong that the decade-long picture is still quite good: Over that period, the S&P 500 had an average annual return of 9.42%. For those who first invested in 1999 or early 2000, of course, this is cold comfort. But it should be some consolation for investors who've been in the market over much of the past decade.
We Survived Disco. We Can Survive This.
History can offer even more consolation to investors worried about where the market may go from here. Despite the depth of the 1973-74 bear market, stocks recovered. Even Watergate, which deeply undermined some people's belief in the American political system, did not derail the market over the long term. It's impossible to make a clear-cut comparison between such momentous and qualitatively different events as Watergate and September 11 on the one hand, or the massive oil spikes of the '70s and the corporate accounting scandals of today on the other. But it is hard for me at least to believe that what we're going through right now poses a far more serious threat to the market than what we experienced — and survived — in '70s.
Weathering a bear market is not about retreating entirely into cash. Nor is it about trying to time tomorrow's market. It's about holding a portfolio that will make sense for years to come. And the best way to build that portfolio, in our opinion, is to work with an investment professional who can help you define your goals, understand your risk tolerance and question your assumptions about the market. Ultimately, a well-diversified portfolio (including stocks) is a level-headed approach to reaching these goals.
Finally, I sincerely hope that no one, stunned by this recent market environment, concludes that investing is so utterly challenging or anxiety-producing that they must monitor their portfolio and the market around the clock. Determine your strategy, design your portfolio, then live your life. Don't let market movements distract you from the people and experiences that make life worth living ... and planning for.
Date of first use: August 19, 2002
The information, including any opinion, is based on various sources we believe reliable, but its accuracy cannot be guaranteed.
This is a publication of Russell Investments Canada Limited. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have.
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