​This has been quite the year for both equity and fixed income markets.  Through June 30, 2022, the S&P 500 Index is down 21.25% and the Bloomberg Barclay’s U.S. Aggregate Bond Index is down -10.23%.  There has been nowhere to hide, and portfolios have been tossed like a ship in a storm!  June has been especially brutal with the S&P 500 Index sliding -8.38% over the past month through June 30, 2022.

​Obviously, none of this is great news.  This is especially true for those individuals who simply “buy and hold” through the storm!
 
If there is a silver lining, it is that Bear Markets do not last all that long.  According to John Hancock funds, the average Bear Market only lasts about 289 days (9.5 months) on average.  The bad news is they hit investors with an average decline of -35.62%.
 
If this current decline is average in any way, we are more than halfway home in terms of days as of the date of this post and about two-thirds the way in terms of percentage decline.
 
Of course, when is the last time anything in your life was just average? Given all the problems in the world with supply chains, run-away inflation, high consumer, and sovereign debt levels and more, it would not surprise me if this decline was anything but average.
 
There are two pieces of good news however that I want to share with you today.  First, if you are a client of In Trust Advisors, you are down far less than the market averages mentioned at the top of this post.  Second, the biggest gains come after the storm.
 
Since you are likely not here to hear me brag about our relative returns, lets focus on the second point, “The biggest gains come after the storm.”
 
First, I would suggest you read our post from last month called The Bigger They Are, The Longer the Recovery.  It will help put into perspective exactly why it is so important to minimize losses and the importance of doing so within the context of average annual stock market returns.
 
In a nutshell, if the average decline for the markets is indeed -35.62%, that means on average it takes a 55.33% gain in the markets to get back to breakeven.  The average market gain in a Bull Market is roughly 10% a year or so based on the average; you are looking at 5.5 years to regain the loss.
 
The kicker is the average bull market is just 3.8 years in length since 1932.  In a typical market cycle, you would have reached the end of the cycle before you recovered your market losses from the prior Bear Market based on the averages.  Most Americans have a relatively short memory, and it is easy to get blinded by the 11-year Bull Market we had from 2009 to 2020, which was the longest in history.  Most bull markets are significant shorter!
 
Going forward, one would expect that the odds favor a return to the mean and shorter Bull markets!
 
I don’t tell this to you to scare you, although it is sobering!  What I wanted to point out that 10% per annum in a Bull Market is an average over Bull and Bear Markets.  If we look at the chart below, you can see that the returns one year after a Bear Market are usually quite a bit larger than the average.  

We went back and averaged them and found that average to be 50%.  Even if you throw out the highest and lowest return years, it is still +46% on average one year after the end of a Bear Market.
 
The moral of the story is historically, you can recover most of a bear market’s ravaged returns in the 12 months after a Bear Market, assuming the average historical loss and that you are fully invested or adding back exposure at the market bottom.    This historically has not been something individual investors have excelled.  They instead buy at tops and sell at bottoms or stay out of the markets entirely, thereby, missing the recovery rally.
 
Another obvious fact is that if you can minimize Bear Market losses, you can be back in the green even faster.  That is the crux of our entire strategy for investors.  We are not able to walk on water, but we have historically lost a lot less in Bear Markets while capturing most of the upside during Bull Market periods, delivering smoother returns over a full cycle and, in theory, higher overall returns.
 
If we can help you garner a smoother ride while potentially earning higher returns over full market cycles, please reach out to us.  We offer a free portfolio review.
 
Disclosures:
 
Past performance is not indicative of future returns or performance.  Neither is past history necessary indicative of what could happen this time around.  Every Bear Market period is different.
 
The S&P 500 index used here is the S&P 500 Price Index.  The S&P 500 Price Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes.  This is index does not include reinvested dividends.
 
The Bloomberg Aggregate Bond Index or "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.  The index includes government Treasury securities, corporate bonds, mortgage-backed securities (MBS), asset-backed securities (ABS), and munis to simulate the universe of bonds in the market. It tracks bonds that are of investment-grade quality or better.

This has been a challenging year for investors.  No one likes to see their portfolio decline even investors with really long horizons.  It is this same distaste for losses that leads to excess fear during market declines and bad decision making, such as selling at the lows and then buying again into short-covering Bear Market bounces.
 
The simple truth for all but the most nimble and skilled of investors is that a Bear Market is no fun!  Yes, there are some managers who do well in a Bear Market, but they are a small number and typically are frequent traders or just happen to specialize in the one area the market that is outperforming, such as commodities and crude oil this cycle.  What you don’t see is the years that that manager underperformed waiting patiently (or not so patiently) for their day in the sun.
 
For most of us that are not traders, our goal in a Bear Market should be to lose as little as possible.  This will then allow us to recover much faster when the smoke clears, the sun again rises and markets start to trend upward again, which they will.
 
Let’s take a look at an example of why this is so important.
 
Here are the assumptions in this example.  First, our example portfolio is $200,000 in value at the end of last year.  The year-to-date loss in the S&P 500 index is -13.44% on a price basis through May 27th and finally that the average S&P 500 Index Return over the last 50 years is +10% (per Investopedia).

If we apply the year-to-date loss to the original portfolio value of $200,000 at year end, we have a portfolio value of $173,120 today.    To get back to breakeven, the portfolio’s owner must earn +15.5% on the portfolio value today and in historical terms, it should take about 1.5 years to get back to breakeven.
 
This is not so bad, but the loss was much worse just a few days ago and I would argue we are probably a long ways from the end of this Bear Market based on historical average returns and lengths in months.
 
For comparison’s sake, let’s take the same assumptions accept the investor had all their money in the HFRX Global Equity Hedged Index (i.e., a representative of the overall hedge fund universe globally) and was down less at just -3.38% through May 27th.

​If we apply -40% loss to the original portfolio value of $200,000 at year end, we have a portfolio value of $120,000.    To get back to breakeven, the portfolio’s owner must earn +66.7% on the portfolio value net of losses and in historical terms, it should take about 6.67 years to get back to breakeven.  Ouch!
 
Now let’s put this in perspective, 6.67 years is roughly 75% of the length of the average Bull Market.  Who wants to wait that long to get back to breakeven? 
 
I would even make the case that the last 30 years of liquidity driven markets have distorted that average Bull Market length.  A return to normal liquidity should result in shorter Bull Market cycles, but I digress.

​Do you have capital to put to work?  There is no better way in an uncertain market than to use dollar cost averaging.
 
What is dollar cost averaging you may ask? 
 
According to Investopedia, Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals.
 
Here is a graphic example, courtesy of Binance:

With dollar cost averaging in green, regular investments are made without regard to price at the time.  Generally, as the example above shows, some purchases are at higher prices and some a lower prices in a volatile market. 
 
The idea is to take the risk out of investing a single lump sum and being wrong on the timing, but instead letting time and the ability to purchase at differing price/cost levels be your diversifier.
 
With single lump sums, if your timing is off, you can cost yourself money in a tough market, like the one we are in now as price moves below your entry price/cost.  Dollar cost averaging helps you avoid this risk.
 
Alternatively, in a fast-rising market, dollar cost averaging can cost you money as you buy at progressively higher levels vs. an early single lump sum.  Although this is certainly a risk, the problem is that very few people have a crystal ball and get their market predictions correct even some of the time.
 
As many of you may know, we are more active in how we manage portfolios and feel we have some insight into markets via our work.  However, we rarely will be put a lump sum to work without averaging into positions over time because market forecasting is just so tough, especially in the short term. 
 
As an example, I have been expecting another bear market bounce as I am writing this post based both on market technicals and an overly negative investor sentiment, however, here we are a few trading days later with some indexes below their March low and others hanging on by a thread.  Who could possibly forecast where markets go from here in the short-term, especially with Federal Reserve Meetings on the horizon?
 
When is the best time to use Dollar Cost Averaging?  The easy answer is any market, but we find it most helpful in volatile sideways or declining markets. 
 
Here is why.  First, you are buying shares at lower and lower costs vs. a higher cost had you done a single lump sum.  You are essentially averaging down, and history tells us there is a market bottom eventually.
 
Second, a stock market downturn produces a kind of “clearance sale” environment. Envision the markets as a department store, with signs everywhere announcing 20% to 40% off. You have a chance to buy into some top-quality companies “on sale.” As a consequence of dollar cost averaging, you can now buy in at a lower price, obtaining more shares for your money.
 
Finally, when the markets eventually turn up, these extra low-cost shares really supercharge the recovery of your overall portfolio vs. waiting to buy when it is clear that coast is clear.
 
Dollar cost averaging is just one of the tools we use for clients in tough markets, like this one.  We also employ hedging and tactical trading in some portfolios and the oldest strategy of them all in many portfolios, raising cash.
 
If your advisor is not adding as much value as he seemed to be just last year, why don’t you reach out to us for a free portfolio review?
 
I can tell you that our clients are not ringing the phone off our hook in this volatile Bear Market!
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