The stock market hasn’t been kind to any investors so far this year with many major indices and currencies plunging to over decades low. Already, many media outlets are touting this year as one of the most unprecedented and difficult times to endure.
One of the hardest things to do in a bear market is to survive and last.
If you can just do this, you’ll likely to last a lot longer than your peers in the stock market for the many years to come. You will see the good times and are likely going to endure another period of difficult times in the next cycle.
This is inevitable – for the many investors who have been in the market far longer than us.
One of the strategy that we will be focusing on this article in on Dollar-Cost Averaging (DCA).
As the name itself implies, it is a strategy where you continue to put in an equivalent amount of allocation during each interval without particularly focusing on timing the market. The idea here is that for the same amount of money allocated, you get to buy lesser units during good times and more units during bad times. If you do it consistently, you’ll average out somewhere in the middle.
It is a proven methods over time (as I will show you shortly) to generate profits over the long run for someone who wants to accumulate and be in the market for an infinite amount of time.
To illustrate this over a simple example, imagine you have $30,000 and you want to spread this money across 3 months. As the market continues to go down during a bear market, you get to purchase 100 units at $100 in the first month, 125 units at $80 in the second month, and 200 units at $0 in the third month.
By now, you have exhausted all your $30,000 allocation across the 3 months – you look at your portfolio and you have a total accumulated units of 425 units at an average price of $70.5. While that is not the bottom, you are not purchasing at the top either. This strategy works well as you wait for the eventual recovery of the market which will happen sometime in the future.
There will always be someone who’s more comfortable exiting the market and waiting for a clearer sign of recovery. By the time that happens, the stock market will not be at rock bottom price too – it can be at $60, $70, or $80, which again can be challenging to assume.
DCA Exercise on S&P 500 Historical Bear Market
Before I summarize the results below, I would like to start off with a few assumptions.
- DCA at monthly interval for an equal amount of purchase allocation
- DCA for the first month will always include the peak of the market prior to the bear market and the last month will always include the trough of the market prior to the recovery
- For all the other months, the data will take the first calendar day of the closing market price
- S&P price is adjusted for any dividend returns
- Returns output will benchmark the previous S&P peak prior to the start of the bear market
The assumptions are all pretty self-explanatory on itself with exception to the last point which I will clarify.
In most of the examples you see on other websites, the 1/3/5/10 year returns will benchmark from the lowest point (trough) of the S&P during a bear market, so naturally your 1/3/5/10 year returns would look magnified if you are counting from the recovery.
What we are interested in is to participate with regular DCA throughout the duration of the bear market and will benchmark the returns based on the start of the bear market, and not the end of the bear market – which is why you are likely seeing a less than “impressive” results than what you see on the other websites.
Okay, let’s start with the earlier few bear markets during the Great Depression era in the 1920s and 1930s.
Those were times when the duration of the bear market is longer and the impact is a lot more severe.
In the years leading from Sep 1929 to Jun 1932, the S&P crashed 86.2% from the peak to the trough. Because the duration of this particular bear market is relatively on the longer end, it will take time for the returns to show positive even while you are continuing to dollar-cost average all these while. The good news is that you break-even shortly after the market recovers and in a 10-year timeframe, you are able to see some good positive returns.
During the Dot-com bubble era where the S&P plunges by 49.1% across a period of 31 months, you’d do relatively well if you continue to stay in the market and would see positive returns in as fast as 3 years and a handsome returns after 5 years. Unfortunately, the 10-year benchmark coincides with another cycle of the bear market soon after that so the returns for the 10-years are impacted as we speak.
The 2008-2009 GFC was a short but memorable one for many investors as it only took 17 months for the S&P to crash by 56.8%, which is a very nasty impact to many financial institutions and retailers which result in over 10% unemployment in the US. Again, using DCA strategy works in this case because not only are you accumulating cheaper during the duration of the GFC but when the eventual recovery comes you are profiting handsomely on your accumulated positions.
The last bear market during COVID-19 was probably the shortest in the entire era of the bear market as it only took 2 months before it started recovering. In this case, the DCA would take the highest entry point at 3,386 and lowest entry point at 2,237 and start returning 36.2% 1 year after.
Conclusion
The current bear market lasted about 9-10 months for the US market, sending S&P down by ~25% from the peak.
As investors, we do not know how long this bear market will last nor do we know the severity of this bear market impact. It could very well recover next month or it could very well recover next year or two, but one thing we do know is that it is likely everyone who invests have a 5 to 10 years duration left in their lifetime, which means that if you just continue to DCA and stay in the market, you’re likely to average out your positions better and see better returns in the future.
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