Be patient: Market recoveries take time


Q: People want markets to quickly get back to where they were before the “crash.” But isn’t a slow and steady rise better?

A: There’s a well-worn cliché on Wall Street with traders: Markets take an escalator up, but an elevator down. Even long-term investors, though, are learning how these words can be brutally true.

Following the vicious stock market crash that started to unfold in 2007, investors are understand­ably eager to at least get their money back. Investors are hoping for a bull market that will repair the damage and deliver returns that would make the heartache of investing at least seem worthwhile.

But recoveries test investors’ patience, and this time has been no different.

Investors typically don’t get much time to react when things start falling apart, yet have to wait for recoveries that are a long time in the making. Market downturns are typically fast and furious. A whiff of bad news, be it negative economic data or evidence of trouble at a key company, can quickly spread. Since investors hate uncertaint­y, just a hint of trouble prompts many to pound the sell button. Correction­s and bear markets can be swift and vicious, giving investors little time to react.

Meanwhile, real recoveries take time. Following a big decline, there’s often an initial and rapid snapback that begins the repair process. But it can take many quarters, if not years, for investors to become confident that the stock market is back on firm ground and that the worst is over.

The most recent downdraft and recovery by the Standard & Poor’s 500 is a classic example. The market’s bout of troubles started in the third quarter of 2007, and things rapidly degenerate­d until stocks hit rock bottom in the first quarter of 2009, or six quarters later. And here investors are, more than 11 quarters after this bottom was put in, and stocks are still 16% below their 2007 high.

And it’s not just recent history that shows bull markets take much longer to play out than bears. Since 1929, the average bull market has lasted 727 days, The Stock Trader's Almanac says. That's nearly double the 387-day duration of the average bear market. To answer your question, it’s not clear if a slower stock market recovery is better than a quick one. In fact, investors sitting on massive losses might wish recoveries came more quickly. But the fact is, using history as a guide, stock recoveries do take longer than the correction­s and bear markets. That’s been the way of markets for decades and why patience is so important when investing.

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