Investor Psychology

The Bear Market Drought Spoiled Us

The past 10 years make it look too easy to make money in stocks. Here’s how to prepare for worse times.

I’m a long-term stock bull. Over the long-term, U.S. stocks have returned close to an annualized 10%. Foreign stocks have returned about 8%. Virtually no other unleveraged investment has produced those kinds of returns.

But sometimes past market action can make stocks look more appealing than they really are. And this is one of those times.

Consider this: Nine-and-one-half years into one of the biggest bull markets ever, Standard & Poor’s 500-stock index has returned an annualized 18.8%.

That’s not a great deal more than the long-term average return, but we’ve still been spoiled. It’s been almost 10 years since the last bear market, and most people have forgotten just how devastating bear markets can be. The 2007-09 bear market saw the S&P 500 plunge 55.3% – the biggest loss since the Great Depression.

But who today really remembers exactly how it felt to watch your investments shrink day after day during that treacherous time?

A Few Sobering Numbers

Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter, offers some cautionary details for those expecting today’s good times to just keep on rolling:

On Oct. 15, 2008, with Lehman Brothers filing for bankruptcy, the S&P 500 tumbled 4.7%. Two days later, the index dove another 4.7%.

Please keep that in mind as your third-quarter investment reports beginning arriving. With bonds returning little or nothing the last couple of years, it’s tempting to dump bonds and put more money into stocks, especially because those third-quarter reports are going to show some dazzling returns in equities.

How dazzling? Over the past 12 months through Sept. 30, the S&P returned 17.9%. Over the past three years, it returned an annualized 17.3%. And the index returned an annualized 14.0% and 12.0%, respectively, over the past five and 10 years.

Wiener points out that the 10-year return numbers are going to continue looking even more glowing over the next two quarters (barring a new bear market) because the last bear market reached its nadir on March 9, 2009.

How bad can things get? Imagine you had put a big lump sum into the S&P 500 index on March 24, 2000, the very peak of the technology stock bubble. Over the next 12 months, your nest egg would have lost 24.5%, and that was just the start of the pain. The S&P 500 lost an annualized 16.1%, 3,7% and 0.9%, respectively, over the three, five and 10 years starting March 24, 2000.

How Should You Invest?

I’m not suggesting that you jettison your stocks. But I do think it’s time to lighten up a bit on U.S. growth stocks – especially some of the giant tech names that are trading at extremely high multiples of earnings and sales. Amazon.com (AMZN), for instance, trades at a trailing price-earnings ratio of 142, and Alphabet (GOOGL), the parent of search engine Google, trades at 48 times trailing earnings.

Great companies are not necessarily great stocks, and even great stocks aren’t great buys all the time. The idea, as we all know, is to buy low and sell high. There’s precious little today that’s cheap among U.S. growth stocks.

The better place to look is among value stocks. Value stocks have crushed growth stocks over the long-term. Since 1940, value has beaten the broad market by an annualized 4.5%, according to the Leuthold Group. The tide has turned over the past 10 years – the Russell 1000 Growth index has topped the Russell 1000 Value index by 9 percentage points per year – but it may be time for value to finally catch up. And value is also where you’ll find many strong dividend plays.

My two favorite value/income plays are Schwab U.S. Dividend Equity (SCHD) and American Funds Washington Mutual F1 (WSHFX).

The Schwab selection is an exchange-traded fund (ETF) that invests in companies that have a long history of paying dividends and the wherewithal to keep those dividends coming. The fund charges just 0.07% annually and yields 2.94%. Over the past five years it has returned an annualized 12.9%.

Washington Mutual is a very conservative fund from American Funds, a very conservative firm with a terrific long-term record. WSHFX must put 80% or more of its assets into stocks that have paid dividends in an at least eight of the past 10 years. The fund yields 1.7% and charges 0.66% annually. The eight managers seek stable blue-chip stocks with good growth prospects, and they’ve managed to return 13.2% annually over the past 10 years.

Investors can buy American Funds’ F1 shares through discount brokers, such as Schwab and Fidelity.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

Most Popular

Tax Wrinkles for Work-at-Home Employees During COVID-19
taxes

Tax Wrinkles for Work-at-Home Employees During COVID-19

Are your home office expenses deductible? How does going out of state to work for a while affect your tax picture? There are some interesting wrinkles…
November 9, 2020
Retirement: It All Starts with a Budget
personal finance

Retirement: It All Starts with a Budget

When you’re meeting with your financial planner, do you talk about your budget? If not, you should.
November 10, 2020
Will Joe Biden Raise YOUR Taxes?
taxes

Will Joe Biden Raise YOUR Taxes?

During the campaign, Joe Biden promised that he would raise taxes for some people. Will you be one of them?
November 10, 2020

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
BCSVX: A Foreign Fund With Flair
Foreign Stocks & Emerging Markets

BCSVX: A Foreign Fund With Flair

Brown Capital Management International Small Company's team of managers identifies exceptional growth companies.
November 24, 2020
Parnassus Mid Cap’s Bets on Industrials and Tech Take Off
Kip 25

Parnassus Mid Cap’s Bets on Industrials and Tech Take Off

This member of the Kiplinger 25 gained 9.5% over the past 12 months, beating 76% of its peers.
November 24, 2020
Build a Bond Ladder
Financial Planning

Build a Bond Ladder

Exchange-traded funds give a new twist to an old technique to navigate a tricky market and manage cash flow.
November 23, 2020