Investors may feel better playing defense in a bear market. But once the market comes back, the gains are likely to be "fast and furious," locking out investors who are on the sidelines, says Mark Riepe, senior vice president for the Schwab Center for Financial Research.
Investors may feel better playing defense in a bear market. But once the market comes back, the gains are likely to be “fast and furious,” locking out investors who are on the sidelines, says Mark Riepe, senior vice president for the Schwab Center for Financial Research.
Historically, stocks have gained an average 47 percent in the first year after a bear market. Annualized gains slow after that, Riepe says. Investors who exit stocks and aim to reinvest at just the right time don’t have history on their side.
“Typically, individual investors bail at market bottoms and re-enter after the market has had its initial big rebound,” Riepe writes.
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In a study of returns after bear-market low points during recessions, Schwab found half of the subsequent 12-month gain comes within just a few months. Historically, the pop occurs even as the economy is worsening.
The more a market falls, the faster its rebound, Riepe says. The Standard & Poor’s 500 fell 52 percent from its Oct. 9, 2007, peak through Nov. 20 — its low so far — making it the worst bear market in 70 years based on percentage decline.
Remaining in safe sectors can result in below-average gains when stocks come out of a bear market, says Citi Investment Research analyst Tobias Levkovich.
The traditionally defensive utilities and telecommunications sectors outperformed the broad market in past bear markets dating from 1929. But after the market bottoms, telecoms historically lagged the S&P 500 by an average of 23 percent, while utilities did 31 percent worse, Levkovich says.