Coping With the Bear

Today’s market climate represents a bear market that historically comes along only once in a generation. Since its peak on March 24, 2000, the S&P 500 is down over 40 percent and the current downturn is at 860+ calendar days and counting, making the current market decline the longest since World War II. The NASDAQ, down around 70 percent, is an index decline not seen since the Great Depression. 

Through it all, there is that nagging temptation to either sneak out of the markets or engage in an all-out mad dash to the hills, seeking refuge from the storm in the form of bonds or cash equivalents. The question on everyone’s mind is “When will it all end?” An end to any bear market is especially hard to predict. However, it’s proven true in the past that the dimmer the mood of the masses, the nearer the end we are. 

There’s certainly no stronger evidence of that mood than in the media’s coverage of this bear market. But the news in the investing world, contrary to most reporting on the subject, has not been all bad. In particular, investors who have implemented maximum diversification by utilizing institutional asset class mutual funds as portfolio building blocks have seen some categories—such as Large and Small US Value Stocks—actually gain ground during this long downturn. While this has not completely spared their portfolios the claw of this bear, it has certainly resulted in a buffering effect allowing most, if not all, of their long-term financial objectives to remain intact. 

We believe now is possibly one of the five or six best times in the last 100 years to buy equities. Why would now, with such gloomy clouds overhead, be the best time to buy or hold stocks? In short – they are on sale! We believe that as long as the world turns, families grow, children need food, clothing, shelter and education and the American entrepreneurial spirit thrives, our economy—and thus the markets—must grow. 

Our exhortation is that owning stocks is the only way to effectively hedge against inflation—and his evil twin, taxation—and create long-term wealth. We know the long term after-inflation, after-tax historical return of stocks over bonds is approximately 3-to-1. Regardless of the current emotional climate in the financial markets, those numbers defy argument. While seeking refuge in bonds or cash may provide some restful nights in the short term, we consider it—due to opportunity costs—as an extremely expensive shelter. 

The only sure way to miss the tremendous gains that typically follow a market downturn like the one we’re now experiencing is to exit the game before it starts. Remember: bull markets historically rise twice as high as bear markets fall and last twice as long. Stay focused on your goals and keep that investment chin up and we’ll see you at the top!

Posted 8/2002

 

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