FA Center: Don’t fear the bear. It gives you chances to pick winning stocks and beat the market.

by | Jul 13, 2022 | Stock Market

Bear markets are an investor’s best friend. During major stock-market downtrends, you stand a better chance of building up a big lead over indexed investors. If your goal is to beat the market over the long term, then bear markets play a crucial role. Of course, even when you beat a falling market, odds are that you still lose money in absolute terms. But “beating the market” is relative, not absolute. 

There is both theoretical as well as empirical support for shifting your perspective. Theoretically, it stands to reason that it would be easier to add value during a bear market, since time spent in lower-risk stocks or other asset classes will cause your portfolio to lose less than the market itself. During bull markets, those lower-risk stocks or alternative assets typically will lag the market. This insight is supported by the data, at least as far as investment newsletters are concerned. The chart below shows the percentage of investment newsletters audited by my firm that beat the market during uptrends and downtrends since 1980. To determine the beginning and end dates of the major trend, I relied on a calendar of bull- and bear markets maintained by Ned Davis Research.

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