Who’s Afraid of a Bear Market?

We made it through October, without much volatility this time – what a change compared to last year! We even got to a new all-time high in the S&P 500 in the last few days. When you reach new records, the pessimists come out of the woodworks and declare that “this is the top” and the next bear market must be right around the corner! It’s like clockwork! And if you go to the popular forums and Facebook Groups in the FIRE community, you’ll see people poking fun at the perma-pessimists. Quite appropriately, I think!

D_mV03eUwAABD3d
Even if we’re at a top, we’ll have another top before too long! Source: Twitter.com, StockCharts.com

But why are people still a bit nervous about corrections and bear markets and market crashes? Being retired now, I have to admit I feel at least a little bit uneasy right now. Why’s that? If I wanted to quantify how afraid I am of something I’d do so as follows: Fear depends on both the probability and the magnitude of something scary happening:     FEAR = The probability of something scary  TIMES  the magnitude of something scary

In my recent post My thoughts on the “Upcoming Recession” I wrote about the probability part. I personally don’t think that the economy is at the brink of a major slowdown (yet) and with the economic growth trend, still intact the stock market will likely chug along. This all looks like a mid-cycle, temporary soft spot.

What makes me nervous about the bear market prospect, though, is the magnitude part; the fact that IF a bear market were to occur (however unlikely that may be) we’d most definitely go through some anxiety for a while. That’s true for all retirees and even folks close to retirement. Probably not so much for everybody just starting out in their accumulation phase, see the post “How can a drop in the stock market possibly be good for investors?” from earlier this year.

Quite intriguingly, though, if you look around in the FIRE community I get the sense that people minimize how scary a bear market will be if it were to start today. And the thought process is:

  1. The market will always recover (see the chart above)
  2. Most bear markets last only about one to two years

It sounds like the bear has really lost its teeth! So, why am I not convinced? There are multiple problems with that line of thinking. That 1-2 years estimate wildly underestimates how long it takes to recover from a bear market.  If you do the math right a bear market will appear a lot scarier than it’s commonly portrayed. Let’s see why…

Continue reading “Who’s Afraid of a Bear Market?”