Bear Markets Are Good For Long-Term Investors

The T. Rowe Price study focused on four hypothetical investors. One began investing in 1929, another in 1950, the third in 1970, and the last in 1979. Each “investor” put $500 a month into a portfolio that replicated the performance of the Standard & Poor’s 500 stock index for 30 years. The study assumed a $10 share price at the beginning of each period, and all dividends were invested in additional shares.

Two of the hypothetical investors—the one who started investing in 1929 and the other who began in 1970—entered the stock market just before two of the worst bear markets in history. During the decade of the Great Depression, from 1929 through 1938, the S&P 500 had a negative annualized total return, losing almost 1% per year, and the 1970s were only slightly better to stock investors, with the S&P averaging a 5.9% annual total return during years of exceptionally high inflation that reduced the value of market gains. Yet the investors could take solace from three positive factors during those dark days.

1) Investing during a bear market, they were able to buy shares of stock at depressed prices, and that let them accumulate more shares than they could have if prices had been higher. This positioned their portfolios for outsized gains when stocks recovered.

2) By dollar-cost-averaging—making regular, equal investments regardless of whether the market was up or down—and reinvesting dividends, the two investors who started during the bear markets would have posted small gains after the first decade. They would have done better than investors who had narrower portfolios or who had invested their money as a lump sum rather than as a series of periodic investments.

3) Compared with the two other investors, who accumulated fewer shares at a higher average cost during the rampaging bull markets that began in 1950 and 1979, the bear market investors fared much better after 30 years. The advantage of the investor who began in 1970 was particularly pronounced, thanks to stocks’ exceptionally strong performance during the 1980s and 1990s.

For the 30 years beginning in 1929, the S&P 500 provided a decent 8.5% annualized return, rewarding that period’s systematic investor with a total return of 960%. Even more impressive, the investor who began in 1970 would have earned a 1,753% total return during the next three decades. And the investors who started during bull markets? Each earned total returns of less than 400% during 30 years of investing, according to the T. Rowe Price study.

The bear market investors thrived because they began when times were tough, rather than despite that apparent misfortune. To prove that point, the study also examined what would have happened if the first two decades of each period had been reversed—so that, for example, the tough sledding of the 1970s had been preceded by the strong market performance of the 1980s, rather than followed by it. An investor beginning $500 monthly contributions in 1970 would have had $589,707 after two decades—but only $358,972 if the decades had been reversed. That was true even though, in both cases, the S&P 500’s annualized return for the 20-year period would have been an identical 11.5%.

Investing in the stock market during a bear market—and during the hard economic times that led to the downturn—requires a leap of faith for new wage-earners as well as for older investors stung by recent losses. But down cycles for stocks and the economy have always been followed by rebounds, and equity markets tend to recover months in advance of a return to economic growth. As the T. Rowe Price study shows, it can pay to take advantage of those trends by beginning a program of long-term, systematic investing just when conditions seem worst. That’s a lesson even middle-aged investors could take to heart as they look to regain their investment footing after the historic market plunge.

Performance data quoted represents past performance and does not guarantee future results. Indices are unmanaged and do not reflect the payment of fees and other expenses associated with an investment. Investors cannot directly invest in an index.