Extended Bear Markets Is Where Future Wealth Is Created
Chapter 31 of The Rational Investor
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“Don’t invest money you can’t afford to lose.”
Cliche investing advice that sounds smart but really only applies to people who either are under diversified or invest in speculative assets.
Rational investors who think long-term and diversify properly should never expect to lose money. At least not permanently. There will be lots of volatility along the way, but diversified investors should never assume they are going to lose their money.
A better piece of advice is not to invest cash that you will need in the next few years. That’s because stock markets can go into so-called “bear markets” that can last several years.
In broad terms, a bear market is described as a large decline in stock prices that persist for an extended period of time. The generally accepted definition of when a bear market begins is when a stock market index drops by at least 20% from its previous peak.
Long-term rational investors with lots of human capital left shouldn’t fear a bear market. If you stay the course and keep investing, extended bear markets are an amazing opportunity to build future wealth.
A brief history of bear markets
The following table is a summary of the bear markets the S&P 500 has experienced since 1929 with data current to the date I wrote this chapter.1
The average of these bear markets lasted 20 months with a 39% decline. However, it should be noted that the length and severity of the “average” bear market are skewed by the two bear markets (1929, 1937) that took place during the great depression.