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Don’t Fear a Bear Market

September 26, 2014
Investing
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By Brian McCann

Learn more about Brian on NerdWallet’s Ask an Advisor

Many investors quiver with fear over a bear market. This is like being afraid of high tide at the beach. Like high tide, bear markets are a natural part of the investing rhythm, so you should get used to them.

At my previous job, I had an acquaintance, and we would talk stocks and investing fairly regularly (our co-workers tended to avoid us during these conversations). At the Christmas party in 2008, I asked her what she was doing with her investments.

“That’s it, I’m out,” she said. “This is going to be like the depression. It will be 10 years before we recover.” I’m not sure what happened to her; we lost touch shortly after.  I hope she decided to get back in at the right time.

Now this may sound like heresy, but if you are a young investor, you should hope for a bear market. This may sound counter-intuitive, so let’s walk through a thought experiment.  Suppose a 30-year-old investor is looking to forward to a 30-year contribution phase to her retirement accounts. If she contributes $10,000 a year into her portfolio, which of the two return profiles would be better?

1)   30 years with an annual return of 10%

2)   10 years with an annual return of 4%, followed by 20 years with an annual return of 12.8%

Both profiles have an average 10% annual return over the full 30-year period.

Go ahead, do the math. I’ll wait.

Profile 2 would be better, right? She ends up with a cool $2.4 million. Profile 1 only nets her $1.8 million.

The stock market is one of the few places where people are dreadfully scared to buy things on sale.  But if you have a long investment horizon, buying during a bear market can turbocharge your returns.

No one likes a bear market. It doesn’t really matter how much math I show you — living through 10 years of low market returns is not going to be comfortable. However, if you keep this example in mind, it may help you to hold firm to your investment strategy rather than getting scared out of the market at the worst possible time.