A bear market is a 20% or more fall in the stock market from a peak followed by a recovery lasting months. Knowing about bear markets is vital since it allows us to plan for worse-case scenarios. In addition, historical data can tell us how long an average bear market lasts, recovers and reaches the previous level.
This knowledge is critical to ensure that the asset allocation of our goals is such that we do not need to sell equity assets to fund a planned expenditure before the market can recover.
We have a shorter stock market history in India than in the US. This article will use data from the SENSEX Total Return Index (SENSEX TRI), which is BSE SENSEX 30 price plus dividends reinvested data, to study bear markets in India. We used Sensex price index data for the Harshad Mehta scam in 1992 since TRI data was unavailable.
Anatomy of a bear market
A bear market is defined as a 20% or more fall from a recent market peak. The peak leads to a trough followed by a recovery where the same index level as the peak is reached.
. Using the March COVID-19 example, we see the SENSEX TRI index reached:
peak: 61,231.45 on 14-Jan-20
trough: 38,017.16 on 23-Mar-20 (38% fall)
recovery: 61,873.26 on 06-Nov-2020 (recovery in 11 months)
Are these numbers typical? We see a few more examples below.
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how soon the bear market came after the market reached a peak: the average is 13 months or just more than a year
how deep was the fall: the average is around 37% which means that a retirement portfolio lost around a third of its longevity. Similar will be the impact on a portfolio in the accumulation stage, but at least in that case there is income available to make up the gap
how long did it take for the market to recover: the average number is 26 months or just more than two years but we need to keep in mind that this 26 months saw zero returns from the equity portfolio in case there was no SIP or lumpsum contribution (market timing/rebalancing) in the middle when the market was down. We are more interested in the 45 months worst case scenario to ensure we exit equity before that to maximize the chance of reaching our goal
A word of caution: when to exit equity as the goal comes close
Just because the worst recovery duration has been 45 months so far, it does not mean that the worst in the future will always be less than 4 years. We do not know what kind of financial crises will come in the future and how long they will last.
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Our asset allocation model for goal-based investing, therefore, errs on the side of caution and completely exits equity before 4 years in the most aggressive risk profile case and before 6 years in the most conservative case.
For investors with the intermediate risk profile, we recommend exiting equity when the goal is 5 years or closer.
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This post titled How many bear markets have we seen in India? first appeared on 05 Feb 2023 at https://arthgyaan.com
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