The chart below gives a highly misleading impression about the nature and duration of historical bull and bear markets. It is somewhat old and put out by a mutual fund company, but I have seen a more recent one published by Morningstar, which should know better (in my humble opinion). To steal from a poet, let me count the ways I do not love it.

The first is that a bull market ends and a bear market begins when the index (the total return including dividends of the S&P 500, which began in its current form in 1957, and an estimate of what it would have been going back to 1926) falls by 20% from a peak value. By doing so, the “Black Monday crash” in October 1987 split the incredible secular bull market that began in 1975 in the chart or in 1982 by other criteria and lasted until 2000 in two pieces. That masks a compounded rate of return over 17% based on the chart data for the 25 year period 1975-1999. The change over that period was over 6000% rather than two periods with “mere” 800+% rises.

Next, what is magic or “official” (meaning from the office, what office?) about a 20% drop ending a bull market and starting a bear market? Two of the ones shown resulted from drops of less than 22.5% that lasted six months. If the standard was chosen to be 15%, 25%, or 30%, the chart would look a lot different.

To point out something that is right, the scale is logarithmic. That means equal vertical distances correspond to equal percent changes, up or down, in the index. Since markets tend to drop faster than they rise and given the definitions of bull and bear, there is a lot more area above the line (in blue if you are seeing it in color) than below the line. That supports the text promoting “the benefits” of investing for the long-term.” It also glosses over the drops of 44.7% and 50.9% in the chart so far in the century. Many investors, even those with a “long-term” perspective are going to have trouble holding on during drawdowns that severe. Analyses of purchases and sales of mutual funds by Dalbar, which I have reported on previously, and of transactions in brokerage accounts have shown that emotional behavior is quite common. It results in selling after a significant drop out of fear that prices are going even lower and waiting until the markets are approaching or exceeding prior highs to buy due to not wanting to miss the “inevitable” higher prices.

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