Oct 31, 2022

Q3 2022: Perspective on the Bear

Oct 31, 2022
Mark R. Gordon — JD, MPP, CFP®, CFA
Chief Investment Officer
Last quarter saw the bear market continue. Global stocks went down almost 7%¹ and US bonds lost almost 5%.² We’ve seen several positive indicators, but war, inflation and a potential recession have battered the markets. Recently a client asked me, given the bear market and bad news, “How can you be so calm?” In the moment, I said something to the effect of, “It’s a combination of belief and experience.” Since that conversation, however, I’ve been thinking more about the question, particularly in light of the “Bear Market Toolkit” we released last quarter.

Within that context, the short story is “Perspective.” But that terse answer belies a long history of experience. Today I’d like to share a bit more about my investing experience and how that has given me the perspective I have today.

I’ve written before about my first investment experiences, so I’ll treat them briefly today. In the fall of 1998, I graduated law school and started my first full-time job as a clerk to a federal judge. As an habitual saver, I began looking for investments other than a savings account for my “real” paychecks. After some research, I found an actively managed stock fund that, for the preceding 10 years, had annualized investment returns of about 18%. With an 18% return, my Excel sheet told me, I could pay off my school loans in rather short order.

My early returns were quite heartening. For those who don’t recall, 1999 was a blockbuster year in the equity markets. The S&P 500 rose over 20%.³ Growth and/or tech funds, of which mine was one, shot up even more. By the end of my first full year as an investor, I felt quite confident in my ability to pick winning investments and reach my financial goals.

The next year, 2000, provided a wake-up call. The S&P 500 dropped 9%,⁴ but many growth and tech funds, 1999’s high flyers, dived much more. By the end of the year, I had given up all the gains I’d enjoyed the previous year, and more: I’d already paid taxes on the capital-gains distributions from the active fund.

At this point in my investing life, I had very little perspective. Investing had seemed straightforward, even easy. Then I faced some very difficult questions: should I continue to invest? If I can’t get 18% per year, should I pay off my loans? Am I doing something wrong?

It was about that time I found a wonderful little book called The Coffeehouse Investor, by Bill Schultheis. The CI is short, funny, and contains so much good information I feel it should be required reading in finance classes. The CI taught me about goals-based investing, diversification, and why costly active funds may not be as good as they appear. That’s when I did some more planning and shifted my investments to more diversified, low-cost funds.

Unfortunately, the bear market continued for another two years. In 2001 and 2002 the S&P 500 fell about 12% and 22% respectively.⁵ Late 2001, of course, saw the awful attacks on the World Trade Center. Although I could see how my diversified portfolio held up a bit better than the S&P, I still lost money each year. At this point, after four years of investing, I still hadn’t actually gained any money. Part of me wanted to give it all up. Why keep putting money in a 401(k) month after month, if the balances just kept going down?

Now I did have more perspective at this point, but the perspective was all bear market! Yet I kept reading about investing: books, magazines, academic papers, anything I could get my hands on. The one thing they all agreed on: investing is a long-term activity. Measured, ideally, not in years but in decades. I decided to go with the collected, collective wisdom rather than my emotional need to not see red ink when opening a brokerage statement. Fortunately, I did not go with my gut. The bear market ended in early 2003. From 2002 until the end of September 2022, stocks have indeed risen. The S&P 500, for example, has gone up more than 500% during that time, even after this year’s bear market:

That’s not to say those 20ish years have been easy. During that time, investors (including me) have faced: hurricane Katrina, a housing market crash, the worst financial crisis since the Great Depression, US debt downgraded, several wars in West Asia, global terrorist attacks, Greek default, the “Brexit” from the European Union, a municipal-bond scare, a global pandemic, a contested US election, political violence, and a host of other events.

Successful investing, in our opinion, isn’t about avoiding bad markets. Rather, success means investing through bad markets. As we’ve written before, we can’t predict the future. The great weight of evidence shows that trying to time the market – get out before it goes down, get in before it goes up – rarely succeeds.

We do believe, however, that perspective can help us succeed. First in a literal sense: looking at the chart above, I admit I was surprised at how tame the financial crisis of 2007-2009 looks. I remember it well: each day felt painful and never-ending as the equity markets, top to bottom, dropped over 50%. Yet today that dreadful period looks closer to a blip than a crisis.

The literal perspective parallels my “personal” perspective. I remember lots of these events, but they have faded over time into the annualized returns. What seemed like the world ending now feels faintly unpleasant, like a flu shot. None was pleasant at the time but as soon as it’s over it’s not a big deal and it’s just part of life. Moreover, it’s bound to happen again.

That’s the perspective that we try to help our clients achieve: things may feel bad now, but they won’t always. And when it’s over it won’t seem nearly as consequential as it does now. If we can handle today’s bad news, and keep perspective, we increase our chances of becoming — and remaining – successful investors.

My investment experience has given me this perspective: when we fear something (say a recession in 2023), one of two things will occur: what we fear will either come to pass or it won’t. If it does come to pass, one of two things will occur: stocks will go up or down. If stocks go down, they will eventually go up again.

We encourage clients to develop their own perspective. We understand that takes time and, unfortunately, it’s rarely pleasant along the way. But if we can remind ourselves that, eventually, today will look and feel like a blip on our investment lifetime, we stand an excellent chance of meeting our financial goals and building a wealthier life.


¹ Global stocks represented by the MSCI ACWI Index (Net). Past performance is no guarantee of future success. All invest returns are from Morningstar unless otherwise noted.
² US bonds represented by the Bloomberg Barclay’s Aggregate Bond Index.
³ Source: Yahoo! Finance.
⁴ Ibid.
⁵ Ibid.

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