By Paul A. Merriman, MarketWatch
Courtesy Everett Collection
The U.S. stock market is at (or near, depending on the day and the hour) its all-time high, and we’re all so used to this situation that we hardly notice any more.
Since this long recovery began in 2009, the market has recorded more than 200 all-time highs.
This suggests some interesting questions:
• Is a bear market just a ho-hum topic?
• Is the concept of risk out of date?
• Are we in a “new era” of endless investment prosperity?
Personally, I don’t think so. But don’t take my word for it.
Warren Buffett: “Be fearful when others are greedy, and be greedy when others are fearful.”
Sir John Templeton, founder of a family of funds that bear his name: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
I thought about all this at length on a cross-country flight a few weeks ago after speaking at an investment conference in Florida. There was plenty of talk at the conference about the potentially exciting times ahead for investors. But also an undercurrent of concern that a huge bear market that could wipe out much of the gains that everyone seems to be enjoying.
If the future turns out to be full of great investment returns, you won’t need any advice from me. It will be easy to accept your good fortune.
But you should know that bear markets — defined as market drops of 20% or more — are normal. You should expect them.
In my experience, many reasonable investors can accept losses of 20% and stay the course.
But how do you feel about losing nearly twice that much in just one calendar year?
In the two bad years of 1973 and 1974, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.45% lost 37.3%.
Ancient history? Already in this century, that has happened TWICE: a cumulative loss of 37.6% in 2000 through 2002 and a 37% loss in 2008.
When you ignore the calendar and measure from peak to bottom, the loss in each of these three bear markets was around 50%.
You can see that graphically in this amazing graph .
In all these cases, the market started down abruptly while the majority of investors were euphoric. That’s typical.