How I've learned to love bear markets

Important information - The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

One of my favourite Christmas presents last year was a small, framed picture of three words: It’ll Be Fine. It was an in joke. Apparently, it is what I say. I suppose I do believe that most things are neither as bad as we fear nor as good as we hope. We muddle through and, most of the time, having been fortunate enough to have been born in Britain in the second half of the 20th century, it really has worked out well.

This is certainly how I have learned to view my investments. I was not always so sanguine. Ironically, when I had less to lose, I worried more. Over time, I have realised that investing really is the Triumph of the Optimists, as a study of a hundred years of stock market performance described it a while ago. Or as the subtitle to Stanley Kubrick’s 1964 black comedy Dr Strangelove put it: ‘how I stopped worrying and learned to love the bomb’.

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The bomb, for investors, is a bear market - the sustained decline in the value of our investments that I have learned to, if not exactly love, then at least embrace. Just as well, you might say, because in recent years the bear has been a frequent visitor. We have experienced 20% plus declines in the value of shares four times in the past seven years. That is more than you might expect on the basis of the 30 bear markets in 190 years identified recently by Goldman Sachs.

The first reason that I am relaxed about equity market volatility is that you have not lost anything at all until you have sold an underwater investment. Unless you sell, it is just a number on a screen. And avoiding being a forced seller of that investment is simple. You just need to ensure that you have enough cash to cover your needs until the market has bounced back. This is doubly important when you start to live off your accumulated savings in retirement. If you are not there yet, and still in receipt of a salary, then so much the better. Just sit it out and wait for the market to recover. In due course, unless the world has permanently changed, it will.

Markets have always recovered their losses, and usually reasonably quickly. Figures from that same Goldman Sachs report show that the average bear market since 1835 has lasted 25 months, seen share prices fall by 36% and recovered within 54 months. The median, which is less impacted by the handful of 50% plus mega bears over that period, is a 16-month decline, showing a 32% drop in value, with a 29-month recovery time.

Which is not nothing. If your goal is to only sell shares at their all-time high, then you might need two and a half years of expenses sitting in cash just to last out the average bear market. That sounds like a lot, but for someone in drawdown it makes sense. Warren Buffett, by the way, ended 2024 with nearly 30% of Berkshire Hathaway’s assets held in cash. My personal investments, for reasons I won’t bore you with, are even more liquid - about 40% cash. It looks absurdly conservative, until suddenly it is a happy, sleep-inducing place to find yourself in. I am not Buffett, just lucky.

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Another reason I can live with equity market volatility is because I know it is the price we pay for the long-run outperformance of shares. Over the 125 years covered by the UBS Investment Returns Yearbook, shares have experienced bigger declines than bonds, even accounting for inflation, which can be a killer for fixed income investments. The worst fall for the US market was 79% in inflation-adjusted terms from 1929 to 1932. But shares have delivered a total return, including reinvested dividends, of 9.7% a year after inflation in America. Doing that year in year out for more than a century has turned £1 into £107,409. The same pound in bonds is worth £268 today. You only get to enjoy that mind boggling differential if you can hold your nerve through the market’s ups and downs.

If you think you will struggle to stay relaxed when markets next get volatile, you can remind yourself of what has happened in the three years after the ten worst one-day falls for the FTSE 100 over the past 25 years. These range from a 5.4% drop during the Financial Crisis to a 10.8% single session fall at the start of Covid. The average gain in the three years following those calamitous declines was 41%. It has paid to remain calm.

Another helpful way of reframing how you look at market corrections is not to compare where you are today with the most recent peak, but rather with where you were, say, a couple of years ago. So, last week, as the S&P 500 fell into a bear market before Donald Trump’s first tariff U-turn, you had a choice whether to focus on the 20% fall from the February high or the 21% gain over the previous 24 months. Same index, different end of the telescope.

The final reason that I am relaxed about the current market volatility is that, by putting my eggs in a few different baskets, I could have significantly reduced its impact. Let us assume that I had taken £100,000 a year ago and invested it 50% in global shares, 30% in global bonds, 10% in gold and 10% in cash - a cautious but not implausible portfolio. Today I would have just shy of £107,000. I really do think it will be fine.

This article orginally appeared in The Telegraph.

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