HOW TO MANAGE YOUR TRADING STRATEGY IN A BEAR MARKET
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In this video we look at past bear markets, and how anyone involved in the stock market, be it a trader or investor, could have taken simple action to protect their wealth, and of course how we can do the same in the next bear market.
Ben Carson in particular has completed some extensive research into past market behaviour, he has made a career managing institutional portfolios, is an author of four books, and was named as one of the top financial advisors in 2017, needless to say Ben has some great knowledge to share.
First let’s look at Ben’s blog where he shares the data from historical bear markets since 1950. Remember, a bear markets technical definition is when the market is down 20% or more.
In this table we have the S&P 500 data showing the peak to trough dates, followed by the decline percentage during each period. We can also see the duration of decline and equally as important the number of days taken for the market to return to its previous high.
The average bear market decline over the past 70 years was 30.2%, with some of the largest falls reaching 50% or more. As we approach the end of May 2022 the S&P 500 has hit a decline low of 19.6%, not quite a technical bear market, but very close.
The two key areas we look to improve on in the video is the maximum drawdown and the duration of drawdown, the objective is to reduce the decline, but equally as important, reduce the time capital is tied up, which I refer to as the opportunity cost.
There are however important points made by Ben before we move on, all of which I completely agree on:
Bear markets are normal and should be expected.
They can be painful, especially for the uninformed.
The reasons are always different but accompanying emotions are always the same.
No one knows how long they will last, but they do come to an end eventually.
Once you accept these points, navigating through a bear market becomes far easier.
A bear market can be measured across other major indices too, for example the Naz dack is down 30% at the making of this video, putting it clearly into bear market territory.
Prior bear markets in the Nazdak can be seen here, like the S&P 500 we have seen significant bear markets since 1970, reaching a significant 77.9% drop during the notorious dot com bubble in the year 2000.
Overall, the average bear market decline has been 37.6% for the tech index.
An approach Ben demonstrates to potentially benefit from a decline, is to buy at the technical definition of a bear market, therefore buying the Nazdack index every time it drops 20%. Similar to an approach I take although I look for a 25% decline before averaging in for a long-term position.
Using the 1990 bear market as an example, the table shows us that if we bought the index at a decline of 20%, after one year your return would have been just over 40%, after three years you would have returned 102% all the way out to 10 years where you would have realized a profit of over 1000%.
Overall, the average return across all the bear markets using a simple strategy of buying at a 20% decline, proved to be ok, however the drawback of this simplistic approach can be seen when there is a major bear market, for example, the dot com crash would have seen you invested for more than ten years and still be in negative territory, this is serious opportunity cost, also emphasising the importance of diversifying across sectors. There is an alternative.
Similar to other strategies in our group, we use a combination of the 20-week moving average and the weekly mack dee.