Bear market rallies are important to understand for those who fancy their chances of catching the bottom or in general time the market. And no better than Nick Magguilli to use plenty of data to drive the point home. US markets were up c.7% in the week ending 27th May tempting many to call the bottom. Nick cites several past instances of bear markets which witnessed temporary bounces on the way down.
“In the realm of U.S. stock market history there are four major bottoms that come to mind—1932, 1974, 2003, and 2009. While all of these bottoms are unique in their own way, they each had at least three ralliesof 10% or more on the way down.
For example, the crash that started The Great Depression had six separate rallies of over 10% before hitting bottom in July 1932.” Showing the chart, he says “If there’s one chart that illustrates the difficulty of investing in stocks, this is it. As you can see, even as the U.S. stock market was collapsing, there were multiple periods where it rallied over 20% before continuing to fall further. Just imagine how maddening this must have been for everyone, even the most seasoned investors.”
He concludes: “Though last week’s 6.6% gain may have you feeling some relief, it’s too soon to tell if we are out of the woods yet. Unfortunately, one week isn’t enough time to differentiate a false rally from a true recovery. In fact, of the 18 rallies I highlighted across the four market crashes listed above, the average length of the typical rally was two to three months. So, regardless of what’s to come, last week was just the beginning.
I don’t say this to scare you, but to provide you with a realistic understanding of how markets work. That’s how you become a better investor. You recognize the nature of the market and invest accordingly. You don’t panic. You don’t change your strategy. You educate yourself and acknowledge volatility when it rears its ugly head. As I stated in Chapter 16 of Just Keep Buying: You have to accept that volatility is just a part of the game. It comes with the territory of being an investor.
This doesn’t mean that you have to be happy when markets decline. Trust me, I do not enjoy seeing stocks fall. But, I also don’t lose my head either. Instead, I see these occasional declines for what they are—risk.
And nothing good in life comes without risk. Not love. Not a career. Not a family. Nothing. So why should money? Why should your wealth magically compound itself at 7% a year? It shouldn’t. At least not in a straight line.
It should be a windy, windy road to get there. And that’s okay. That’s what you should expect to happen. The volatility of today should pay for the growth of tomorrow. Not in every market every time, but in most markets most of the time. That’s what matters. That’s what the data suggests.
Of course it’s easy to talk about this in a vacuum. It’s easy to point at charts of years past and say “Buy and hold”, but it’s much harder to “Buy and hold” while living through them. Then again, maybe that’s what separates the good investors from the great ones. Unfortunately, there’s only one way for you to find out.”
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