4 Things the Smartest Investors Know About Bear Markets

The past year has been hard for many investors. Runaway inflation and rising interest rates sent the S&P 500 spiraling into a bear market, and the benchmark index is currently on pace to produce its worst return since 2008. Drawdowns of that magnitude can be a nerve-wracking experience, but understanding a few important facts can help investors keep calm and make better decisions.

Here are four things the smartest investors know about bear markets.

Image source: Getty Images.

1. Bear markets occur about once every six years

Bear markets are relatively common. In fact, the S&P 500 has gone through eight bear markets in the last five decades, meaning the index drops by at least 20% once every six years. That said, bear markets are not evenly spaced. There were no bear markets between 1987 and 1999, but four bear markets occurred between 2000 and 2010.

2. The average bear market lasts about 335 days

An S&P 500 bear market ends on the date the index hits a low point, provided the index rebounds at least 20% from that trough. That means it is only possible to recognize the end of a bear market in retrospect. Investors must wait for the S&P 500 to climb at least 20%, and only then can they be certain the next bull market has started.

The chart below details the start date, duration, and severity of each S&P 500 bear market over the last five decades.

Data source: Hartford Funds.

As detailed above, the average S&P 500 bear market during the last five decades has dragged on for about 335 days, during which time the index fell by an average of nearly 37%.

It takes about four years for the S&P 500 to reach a new high following a bear market

While it typically takes less than a year for the S&P 500 to hit bottom during a bear market, it takes much longer for the index to reach a new record high. In fact, some S&P 500 bull markets end before the index achieves a new high point.

The dot-com crash is a good example. A short-lived bull market actually broke the dot-com crash into two separate bear markets. But after slipping into the first bear market in March 2000, the S&P 500 didn't achieve a new record high until May 2007. The same thing happened during the financial crisis of 2008.

The chart below details how long it took the S&P 500 to reach a new high during each bear market over the last five decades.

Data source: Yardeni.

As detailed above, once the S&P 500 slips into a bear market, it has historically taken about 1,492 days (or just over four years) for the index to reach a new high.

4. Many of the S&P 500 index's best days take place during a bear market

Over the last two decades, 50% of the S&P 500 index's best days took place during a bear market, and another 34% occurred during the first two months of a new bull market (before it was clear the bear market had ended). In other words, more than 80% of the market's best days actually take place during or in close proximity to bear markets, and missing those days is one of the worst mistakes an investor can make.

For instance, the S&P 500 produced an annualized total return of 10.7% during the 15-year period that ended on Dec. 31, 2021, according to Putnam Investments. That means $10,000 invested in an S&P 500 index fund on Dec. 31, 2006 would have grown into $45,682 during that time. But if the 10 best days are subtracted from the calculation, the annualized total return drops to 5.1%. That means an original investment of $10,000 would have grown into just $20,929.

In other words, investors who missed the 10 best days during that 15-year period paid a high price for attempting to time the market. They would have made much more money (and done less work) if they had simply stayed invested.