Bear Market Survival Guide
Millions of investors have never experienced anything like the painful stock
market slump we’ve seen over the past year. A record-shattering bull market
that had endured more than nine years peaked in March 2000.
In the following 12 months, the U.S. stock market fell more than 28%, as
measured by the Wilshire 5000 Total Market Index. Some $4.2 trillion in
market value evaporated in less than a year. And the decline was not confined
to the United States—foreign stock markets also fell sharply.
In the midst of the first bear market in a decade, it’s not surprising that many
investors are worried and wondering what to do. This Plain Talk bulletin
aims to put the market downturn in perspective and offers six common-sense,
time-tested guidelines to help investors cope with market volatility.
Six bear market survival tips
In 1924, cowboy humorist Will Rogers offered a simple rule for successful
investing: “Take all your savings and buy some good stock, and hold it ’til
it goes up, then sell it. If it don’t go up, don’t buy it.”
Of course, Rogers was joking. Unfortunately, many people think that they can find a method to buy stocks just before they go up, and sell them just
before prices fall. But after decades of watching, we have yet to see a timing strategy that has consistently outperformed a buy-and-hold strategy.
Even if timing strategies were found to work “on paper,” the real-world costs of trading and taxes would almost surely doom them to subpar results.
But if “avoid downturns” isn’t the answer, what should investors do? These six basic guidelines can help you continue toward your long-term
investment goals, come bear or bull market.
Don’t act impulsively. guidance on carrying it out, it’s likely that you are
“the leading expert” when it comes to your own
It’s natural—even for experienced investors—to
finances and temperament.
become nervous when account balances are falling
along with the financial markets. The urge to change
your investment mix can be powerful, especially
when a downturn gets worse and news gets grimmer.
3 Keep your balance.
How badly has the bear market mauled your
But impulse and emotion are enemies, and it pays to
portfolio? That probably depends on the extent
resist them. This is true not only in bear markets but
to which you had diversified your holdings.
also in bull markets, when euphoria can tempt you
to “double up” on your holdings that are performing Fooled by the unusual length of time that large-cap
best. For example, during the latter stages of the growth and technology stocks had led the market,
1990s bull market, many investors switched from some pundits were saying that the “new economy”
lagging market sectors (bonds and value stocks) into had made diversification an obsolete idea. But then
soaring technology stocks. The switch proved very technology stocks abruptly changed from leader to
costly as technology stocks plunged. laggard—an event that has occurred across all sectors
Follow your plan, not the herd.
Savvy investors understand that returns from stocks
many times in the past, as shown below.
Past Performance Is No Guarantee—Really!
Rank Among Market Sectors Based on Total Returns
and bonds constantly fluctuate and that these ups Economic Sector ‘85–’87 ‘88–’90 ‘91–’93 ‘94–’96 ‘97–’99 ‘00–’01*
and downs will sometimes be extreme and lengthy. Consumer Staples 1 2 8 6 6 6
The key is not to avoid downturns (see tip #1) but Basic Materials 2 10 6 7 11 8
rather to prepare for them by selecting a mix of Health Care 3 1 10 2 4 4
stocks, bonds, and cash investments that makes sense Communication Svcs. 4 3 7 8 2 10
for your situation. Your plan should be based on such Utilities 5 5 9 10 10 1
Consumer Cyclicals 6 8 2 11 3 9
basic but unique variables as your investment time
Capital Goods 7 6 5 4 5 7
horizon, your objective, the security of your income,
Energy 8 4 11 5 8 2
the extent of your resources, and your tolerance for
Financial Services 9 9 1 3 7 3
market fluctuations. And while you may want to
Technology 10 11 4 1 1 11
seek an expert second opinion on your plan or some Transportation 11 7 3 9 9 5
*Through March 31, 2001
Sources: The Vanguard Group, Wilshire Associates Inc.
Perhaps the single biggest lesson from the
2000 –2001 downturn is that diversification—the
simple concept of not putting all your eggs in one
4 Continue your investment program.
Most investors build wealth systematically through
basket—is still an investment virtue. That means
regular investments, perhaps by payroll deductions for
diversifying across asset classes—stocks, bonds, and
a retirement plan at work or through an automatic
cash—but also within asset classes. Include both
investment program. This systematic approach—
growth and value stocks, as well as large-, mid-, and
known as dollar-cost averaging—can help you to put
small-capitalization companies in your portfolio. the market’s fluctuations to work for you by lowering
the average price you pay for fund shares. And it can
Diversify to Manage Risk be a disciplined way to keep emotion from altering
60% Stocks/ Broad Stock Growth
40% Bonds Market Stocks your plan. Clearly, dollar-cost averaging cannot
guarantee you a profit on your investment or protect
–11.2% you against losses when stock or bond prices are
–15 falling. And dollar-cost averaging is unlikely to work
–20 –24.8% for you if you are unwilling or unable to continue
investing during a long downturn in the markets.
–35 After all, to earn the stock market’s 15.0% annual
–40 –42.5% average return over the past 20 years, an investor had
–45 to stay invested in stocks through two earlier bear
markets—including the October 1987 crash and the
This chart compares the total returns from March 31, 2000, through March 31, 2001,
of three hypothetical asset mixes: (1) 60% Wilshire 5000 Total Market Index (the 20% decline from July to October 1990, a period
entire U.S. stock market)/40% Lehman Brothers Aggregate Bond Index (representing spanning Iraq’s invasion of Kuwait.
the total market of U.S. bonds with maturities over one year); (2) 100% Wilshire 5000
Index; and (3) 100% Russell 3000 Growth Index (the growth stocks among the 3,000
largest U.S. stocks). By ensuring that your portfolio is balanced and broadly diversified,
you won’t escape damage during a bear market, but you may avoid a catastrophic
A way to make up lost ground
decline. Note that past returns are not an indication of future returns.
If you think the bear market is endangering your chance to meet your
investment goals, you may want to boost your savings. No one can
Moreover, by investing in mutual funds rather than
change the past or future returns from the financial markets, but you
individual securities, most investors have been better
may be able to increase how much you’re investing.
able to manage risk through diversification. Research
by Morningstar, a mutual fund tracking company,
shows that nearly one in every three U.S. stocks lost
20% or more of its value in 1999. Yet fewer than one
in every 400 U.S. mutual funds lost that much over
5 Make any portfolio changes gradually.
If the bear market has convinced you that your
the same time period.
tolerance for the volatility of stocks is less than
you once thought, or if you’re simply frightened,
No bear for bonds you may want to “sell down to the sleeping point.”
But Vanguard suggests that you act in a measured
Despite the bear market for stocks, bonds have been in a bull market. In
way. Change your long-term investment portfolio
the 12 months ended March 31, 2001, the bond market returned 12.5%,
gradually, and resist the urge to make drastic
as measured by the Lehman Brothers Aggregate Bond Index. Bond prices
changes. This reduces the chance that emotions
move in the opposite direction from interest rates, so as interest rates
are overriding a sound plan. Consider a limit of no
declined amid a slowing economy, bond prices rose.
more than 15% in changes to your allocations. For
Money market investments also have provided solid returns amid the stock example, if your asset mix had been 70% stocks/
market slide: The Salomon Smith Barney 3-Month Treasury Bill Index earned 30% bonds, you might gradually move toward a
6.0% during the 12 months ended March 31, 2001. mix of 55% stocks/45% bonds.
Cheaper may not be cheap Online help for bear
Hundreds of individual stocks—and the market as a whole—are much cheaper market survivors
now than a year ago. However, that doesn’t necessarily mean they’re
bargains. Before the downturn, stock prices had risen to unprecedented
heights compared with such fundamentals as earnings, dividends, and book Has the recent real-world “stress test” given
value. Despite steep declines, price/earnings ratios and other valuation
measures for the overall market are still above long-term norms. you the sinking feeling that your risk tolerance
isn’t as high as you thought? Find out if your
6 Tune out noise.
investment program matches your needs by
Ever felt dazed by the volume of facts, opinions, and
statistics about the markets and investing? You’re not
alone. Unprecedented amounts of information— taking Vanguard’s Investor Questionnaire at
in print, via broadcast and cable, and over the
Internet—flow to investors, including minute-by- www.vanguard.com/?planning.
minute accounts of every day’s doings in the financial
markets. Unfortunately, the overwhelming focus is on
short-term events and forecasts, which amount, in the Simply answer a few questions about your
end, to little more than noise. More information
available in more ways can be a good thing. But the investment objectives and experience, time
risk is giving in to the natural itch to react to all the
information—to do something with it. Successful
horizon, risk tolerance, and personal situation;
investors are able to tune out the noise and keep their
focus on their long-term investment goals and plans.
This isn’t easy, especially when markets are soaring or the questionnaire will help you reassess your
slumping, and the Internet enables you to check your
account balances by the hour. But changing course asset allocation—and even give you fund
with each new piece of information or commentary is
unlikely to get you to your destination.
suggestions. Or speak with one of our skilled
Make a plan; stick to it associates at 1-800-662-7447.
As the past few years have shown, financial markets are fickle and
unpredictable. But your investing strategy should be reasoned and
steadfast. Once you’ve built a plan that makes sense for your
situation and rests on the reasonable assumption that markets will
go through periodic ups and downs, you’re in a position to stick with
it, come what may.
The bear in perspective
The 2000–2001 decline was the worst since 1987, when
broad market indexes fell 33% from August to early December. Just what is a bear market?
However, the bulk of that drop occurred on one day: the record A bear market is Wall Street jargon for a sharp decline in prices. There’s
–22% crash on October 19, 1987. Though severe, the 1987 no official definition, but a bear market for stocks generally is defined as a
downturn was brief—about three months from start to finish. decline of 20% or more in broad market indexes over at least a two-month
By contrast, the bear market that began in March 2000 has period. (A bull market refers to a prolonged period of rising prices.)
stretched for 12 months so far. Although it has been punctuated
by a number of strong interim rallies, the downtrend has been Despite the market’s slump, the economy has not yet fallen
persistent. into a recession—when economic output and employment fall.
The Federal Reserve Board has been aggressively lowering
One striking aspect of the 2000–2001 downturn is the
interest rates in an effort to ward off a recession. Statistical
uneven nature of the damage. The worst carnage occurred
data available through March 2001 point more to a sluggish
in technology, the best performing sector in 1999 and early
economy than to a shrinking one.
2000. The Nasdaq Composite Index, which is dominated by
large tech stocks, gained 87.4% in 1999 en route to an all-time
Longer-term returns still solid
high of 5049 in March 2000. But all those gains and more
Despite the past year’s losses, longer-term results from the
were lost as the index fell 64% from that peak to 1830 one
stock market have been quite good by historical standards.
As bad as the 2000–2001 decline has been, those who’ve
Yet while dozens of formerly high-flying stocks from the tech been in the stock market for five years or more probably have
sector have been savaged by losses of 75% to 90%, a number achieved sizable gains, thanks to the extraordinarily bountiful
of stocks that had lagged far behind in 1999 and early 2000 years preceding the downturn.
have enjoyed solid gains since then.
As the adjacent table shows, the average annual total return
of the Wilshire 5000 Index for the past 5 to 20 years has
No “new era”
been well above the 11% average annual return from stocks
In part, the uneven impact of the bear market reflects the
over the past 75 years.
extremes of valuations for stocks in early 2000, when talk of
a “new era” for stocks was rampant. Many large technology
Returns From the U.S. Stock Market*
stocks were selling for more than 100 times earnings from the Periods Ended March 31, 2001
previous year, and many new Internet-related companies had 1 Year –19.1%
huge market values even though the companies were posting
3 Years 3.8
big losses. At the time, skeptics’ warnings that the stocks
5 Years 14.2
were wildly overvalued fell largely on deaf ears; in retrospect,
it’s clear they were right. 10 Years 14.8
15 Years 14.2
But the stock market downturn also reflected a general
20 Years 15.0
slowing in the economy during 2000. This slowdown made it
*As measured by the Wilshire 5000 Total Market Index.
plain that corporate earnings could not grow at anything like
the rapid rates needed to justify the high prices for many large
tech stocks. Indeed, in short order many companies were
warning that their earnings would decline. As the market
euphoria ended, many dot-com stocks were doomed—their
operations were unprofitable, and investors declined to keep
pumping cash into them.