The stock market's already been through some ups and downs in 2023. But it's been more up than down. The S&P 500 (^GSPC 0.16%) is up by a couple of percentage points since the end of last year despite its recent stumble, and it is still up nearly 9% from October's low. The movement of late suggests that we are easing out of the bear market and into a new bull trend ... maybe.
Before we move any further into whatever awaits us, though, it might be worth a look back at last year's poor performance to glean a few lessons from the bear market. One of them stands out above the rest.
That lesson? It's a two-parter. First, know that nobody knows for sure when a bear market will end; it doesn't become clear until after the fact. And second, know that you absolutely don't want to be waiting on the sidelines at the time a new bull market gets underway.
This reality should affect how you manage your portfolio during a bear market.
Image source: Getty Images.
You'll never see it coming
It can't be stressed enough -- the bear market might not be over. The S&P 500 may seemingly be in a recovery mode right now, but it's not yet rallied the 20% off a low (and sustained that rise over a couple of months) that typically flags a new bull market.
Nevertheless, now more than 13 months removed from the previous bull market's peak, it's at least arguable that we're nearer the end of the bear market than not.
And it's this likelihood that illustrates the chief lesson to be learned here. That is, back in mid-October, few investors suspected the low hit at the time was the bear market bottom. If anything, the professionals and amateurs alike were fearing much more downside was in store. An Oct. 11 headline from Business Insider reads: "As the 3rd-quarter reporting season begins, markets are bracing for signs of a recession that could send stocks into a deeper bear market."
Later in the same month, analysts with investment management firm BlackRock wrote: "We see a bigger problem for stocks than any potential positives from the midterm election outcome: a looming recession." Around that same time, hedge fund Saba Capital Management's founder Boaz Weinstein commented on the condition of the global economy: "There isn't a rainbow at the end of all this." His ultimate fear is a decades-long bear market.
Weinstein and all the other pessimists at the time may well be proven right in the end. In the meantime, though, anybody taking their advice has missed out on a healthy recovery of about one-third of the bear market's net losses. More of the same may well be in store.
The thing is, any investor who missed out on any or all of this particular rebound is actually rather lucky. Stocks could have dished out so much more, and done so at a much faster clip.
The cost of waiting can be high
The transition from a bear market to a bull market often isn't shaped like you'd expect it to be. While economic rebounds are typically slow and gradual, stocks' pivots out of bear markets into bull markets are often sharp, singular events that lead to explosive initial gains.
Mutual fund company Hartford did some digging along these lines, finding that about one-third of the market's very best daily gains take shape during the first two months of a bull market. And, ironically, about half of the market's very best daily advances materialize during a bear market.
Missing out on them can cost you big time too. The fund company goes on to say that between 1990 and pre-pandemic 2019, missing out on just the market's 10 best daily gains during that time would have halved your gains achieved with a simple S&P 500 index fund. If you weren't in the market for the 30 best days during that two-decade stretch, your net gain with an S&P 500 index fund would only be one-fifth of what it could have been just by sticking with an index fund ... even when it's uncomfortable to do so.
Brokerage firm Edward Jones illustrates the idea in a different way, pointing out that the S&P 500 has rallied an average of 25% during the first three months of the last five bull markets.
Connect the dots. The cost of waiting for absolute certainty can be high. The most productive move is just staying in the market -- or holding your nose and diving in -- even if there may be more downside left to suffer.
Win the timing game by refusing to play it
Yes, the moral of the story is: Buy-and-hold still works best for most people.
That's not to suggest you must simply dismiss any timing-minded moves. You should buy on dips, and you should exit positions in wobbly companies after these stocks muster gains. You should also keep your finger on the broad market's pulse, if only to determine whether a stock's weakness stems from company-specific problems or if it's simply being pushed around by the market's bigger tide.
But it's easy to be penny-wise and pound-foolish. You're not going to spot the exact bear market low, and attempting to do so can easily mean you're leaving money on the table.
Your investing strategy should be far simpler. That is, forget the backdrop, buy quality stocks after big pullbacks, don't be afraid to pay up for quality, and remember this is a game won by investors who can leave their trades alone for years on end.
