What Hurricane Irma and Bear Markets Have in Common
Hurricane Irma devastated many parts of Florida over the last 24 hours. Yet Floridians are exceedingly lucky.
Why? My dad’s dad, long gone now, could have told you.
Both he and my father were born and raised in Daytona Beach, Florida.
My grandfather often said that the most terrifying thing about the hurricanes he experienced as a boy was not the high winds, the heavy rains, the storm surge or the flooding.
It was the fact that these monsters just showed up at your door suddenly, without warning.
He grew up in an era without Doppler radar, satellite imagery, computer tracking models and 24-hour cable coverage (not least of all because there was no TV - and no cables either since electricity didn’t become widespread until the 1930s).
In those days, Floridians would look up and see the blue sky turn gray. The wind would start to blow. And then all hell would break loose, sending folks running for cover - and their lives.
Hurricane Irma packed a wallop. The cleanup will be long and expensive. But at least Floridians had several days to prepare.
Bear markets are more like hurricanes circa 1900.
No one can tell you when they will hit. (Although some individuals make a good living trying to guess.) You don’t get several days’ warning. You don’t have time to “evacuate” your stock positions.
Preparations must be made in advance. Or you risk havoc.
In my experience, too many investors don’t take the proper precautions. Instead, a rising market - especially one that has shown as little volatility as this one over the past 8 1/2 years - lulls them into complacency.
Then when the storm hits - as it always does eventually - they react emotionally instead of rationally. And soon regret it.
So let’s take the time now - while the market is only a couple percent below its all-time high - to examine the typical bear market and how you should prepare for it.
According to Ned Davis Research, over the past 100 years, bear markets in the U.S. occurred every 3.1 years. The average duration was 15 months. The average decline was 32%. And the average time to recover to the old high was another 2.1 years.
So the average round trip from the beginning of the slide to full recovery was approximately 3 1/2 years.
However, these are just averages. Some bear markets are nasty.
For instance, the one that began in 1973 didn’t return to its old high until 1985, 12 years later.
The bear market from August to December 1987 - where stocks lost a third of their value - included the stock market crash of October 19. The Dow plunged 23% in a single day.
In the recent financial crisis, the S&P 500 fell 56%, and the decline lasted 17 months.
And the bear market that started in 1929 - and also included a single-day October crash - saw share prices fall 89% from peak to trough. The Dow didn’t reach its old high until 1954, 25 years later.
Of course, if you want to consider the worst major bear market of the modern era, you have to think globally. In 1989, the Nikkei 225 - Japan’s equivalent of our S&P 500 - topped out at 38,957, then didn’t hit bottom until 2009, when it touched 7,054, an 82% drop.
Today the Nikkei 225 is only half of what it was in 1989, 28 years later.
Clearly, bear markets - like hurricanes - can do tremendous damage.
The question is what should you do now to prepare for the next “Big One.”
My answer is...
- Make it personal.
- Perform a “portfolio pre-mortem.”
- Make six specific moves to safeguard your principal and your profits.
I’ll detail each of these vitally important steps in my next column.
Thoughts on this article? Leave a comment below.