How long does it take equities to recover from a bear market?
By that I mean not just how long does it take for a bear market to end. Bears can be officially over in months.
But how long does it take us for us to recover our losses? To get back in the black?
Sadly, that’s a much longer slog…
UK bear market recovery times
The financial software people at Timeline have produced an excellent chart tracing the severity and length of UK bear markets.
They calculated the recovery time for £100,000 of UK equities after each bear market from 1926 to the end of 2021.
The graph line reveals the extent of the loss at market bottom.
The END dates show when your investment finally breaks even – that is, when your investment is worth £100,000 again (dividends reinvested).
The data reveals that the:
- Average bear market recovery time is 18 months
- Shortest bear market recovery time was 11 months (Fallout from the US ‘Vietnam War’ recession)
- Longest bear market recovery time was two years and seven months (Dotcom bust)
That’s recovery time after the end of the bear market itself.
How long does the whole thing take?
The total duration of a bear market event is more daunting when you add its downward leg to the recovery time back to breakeven:
Data from the Timeline Chart 2022. Dividends reinvested. Nominal returns.
The total length of a bear market including recovery time is:
- On average: three years and one month
- Shortest: one year and four months (Coronavirus crash)
- Longest: five years (Dotcom bust)
Quite the buzz kill, right? The total recovery time was still over a year for even the short yet savage 1987 and pandemic crashes – despite the fact that both lasted only a couple of months as bear markets.
And grim as these totals already are, they also miss out a crucial component: inflation.
Because as investors living in the real world, we don’t care about the beauty contest that is nominal wealth.
We care about our purchasing power. So we need to know how much our investments are worth in real terms.1
The question: how soon do we recover from a bear market, taking into account inflation?
UK real-return bear market recovery times
Professor Wade Pfau calculates the UK stock market took 11 years to recover in real terms from its 1972-74 crash. As opposed to four years and ten months in the nominal returns table above.
And using crude annual returns, I’ve calculated the real recovery time for a few more UK bear markets (dividends included) as follows:
| Bear market | Nominal recovery | Real recovery | Real duration |
| 1929-32 | 1935 | 1932 | 3 years |
| 1937-40 | 1941 | 1944 | 7 years |
| 1972-74 | 1977 | 1983 | 11 years |
| 2007-09 | 2011 | 2013 | 6 years |
Ironically, UK deflation shortens the real recovery time of our version of the 1929 crash.
But when it comes to the other three UK bear markets, factoring in the wealth-whipping headwind of inflation pushes out recovery times significantly.
US bear market real-return recovery times
We can calculate real-terms recoveries more accurately thanks to publicly available data for the US stock market.
Here are the inflation-adjusted bear market recovery times for the S&P 500:
Calculations made using DQYDJ’s S&P 500 return calculator. Monthly returns. CPI-adjusted. Dividends reinvested. Fall % is a nominal return.
Now we have a more realistic view of the impact of multiple bear markets.
Bear market recovery time, adjusted for inflation, and including the down leg measures:
- On average: four years and four months
- Shortest: six months (Coronavirus crash)
- Longest: 13 years (Dotcom bust)
However, if we bundle up the series of slumps that marked the Great Depression, we get one giant bear lasting from September 1929 to January 1945. That’s 15 years and four months until you broke even.2
At least that’s better than the oft-quoted 25 year recovery time that doesn’t include dividends or deflation, and is based on the narrower Dow Jones index.
We can see that inflation adds more than a year on average to bear market recovery times by crudely comparing the UK’s nominal three year and one month average to the full-fat four year and four month total bear duration.
Moreover, the US suffered three lost decades. One great bear leaves investors covered in paw prints every 20 to 25 years.
There’s a fairly clear, if imperfect, correlation between the depth of the decline and the length of the recovery.
Once we’re slammed into -45% territory then you’re looking at a real return recovery time of half a decade or more.
What’s the worse case scenario?
As detailed in our gargantuan bear markets primer, major meltdowns can be brutal. It took more than 31 years to recover from Japan’s 1989 bear market.
The worst bear I’ve read about is Austria’s 89 year wait to breakeven. That followed a -96% carve-up in 1914-25.
My best investment advice: don’t invest all your money into an empire that loses a world war and is permanently dismembered in the aftermath.
In fact, even Austria’s death plunge isn’t as bad as the total wipeouts sustained by Russian and Chinese investors after their Communist Revolutions.
Buy and hold definitely doesn’t work when the Marxists shut down the stock exchange.
Living in the real world
Above we’ve considered market data. But in reality, the bear market recovery time we experience will be further drawn out by investment costs.
We can improve our results by pound-cost averaging through the downturn – and by diversifying into defensive assets such as government bonds ahead of time.
The chart below shows how a higher allocation to high-quality government bonds sped up the recovery from the coronavirus crash vs a pure equities portfolio:
Source: JP Morgan: Guide to the Markets. 31 May 2022. Page 63.
Perhaps even more importantly, a 60/40 portfolio dramatically reduced the severity of the bear market.
Experiencing shallower swoons makes it easier to stay the course. It’s far harder to come back from a bear market if you panic sell after a deep loss, lock in your losses, and then miss the rebound.
Take the right steps to protect your portfolio ahead of time. It’s usually too late once a bear market runs wild.
Take it steady,
The Accumulator
- Real returns subtract out inflation from your investment results. They’re thus a more accurate portrayal of how your capital has grown in relation to purchasing power than are standard nominal returns. [↩]
- The November 1936 recovery from the 1929 crash lasts only a few months before the next bear begins in March 1937. [↩]
I notice that the higher the inflation rate the longer the recovery takes and the less effective the equity/bond split becomes.
I have been increasing my exposure to TIPS.
Thank you @TA, interesting to see the different timescales and compare UK vs. US. Although totally agree pound cost averaging in any downturn and diversification can help. However with regards to diversification, I do think its worth noting (just as you noted for Covid Crash how bonds helped for that period), that so far for 2022’s “Bear” they have not helped much, YTD numbers from Morningstar:
VWRL -3.9%
IGLT -11.7%
RL Global Index Linked Fund -7.4%
Its weird to see Lifestrategy 100 doing better -3.1% than Lifestrategy 20 -8.9%.
I also think just looking at this this year to date, some of the Alternatives commonly used as diversifiers are holding up pretty well. My preferred Renewable Energy IT has helped (up 11.6%), as has my main physical Property IT (11.8%), Infrastructure IT is also up just (2%). Not all my diversification has helped though PE (-15.2%). I don’t personally hold any hedge funds, but a mainstream one available to private investors, which @ZXSpectrum has mention previously is up 18.6%.
Great article thanks, oh heck, last year’s just one more year full time working to fire, is looking like best add another year to that or coast in a part time gig.
Damn you inflation thought I could just pretend you would always stay below 5%
Can’t enjoy the bull years without riding out the bear 🙂
Close the hatches and prep for the storm!!!!!
It does not have to bad news that market takes longer to received. It can be the good news for investors depending on where they are on their journey. If you DCA from your salary and still got plenty time to retire then it is a good news it takes longer for the market/your wealth to recover. You will buy cheaper, therefore you will increase the odds for positive returns in a future.
@Peter it’s only good news in the short term though. Every investor who “gains” while in accumulation mode has to save more to hedge the risk of the bears that might occur in decumulation mode. Given that the point of FIRE (and investing more generally) is to get into decumulation mode, the bears just mean more of your life working.
But you don’t have much choice in the matter.
@miner2049r, yep OMY threatening to become TMY – where T could be Two or Three!!!! 🙁
Whettam, my green energy infrastructure trusts have kept me positive YTD, along with holding no bonds over 5 years, no tech, no US equity unless they happen to pay reasonable dividends.
JLEN Environmental Assets Group has been the standout performer for me, up 26% YTD. So much so I have sold down the bulk of the gain to redeploy, as it had grown to be my largest single holding after a dull 2021.
Anyway, my positioning coming into this year was heavily influenced by the CAPE ratio by country, which was covered here the other day 🙂 , and looking back at how long bear markets can run, even for the golden boy index the S&P500.
This article is an excellent reminder that the current bear market still likely has a way to run, and adjusting for inflation there is a lot of lot of ground to make up.
As such, and as I don’t have decades to accumulate, I demand dividends/income as risk compensation now more than ever.
I always find content like this fascinating. Two things leap out to me. Firstly this reinforces that the liability matching approach (covered in your Pension Split Series) best matches my personality to deal with any pre-pension age gap. Falls and recovery times like these just aren’t worth messing with in my opinion (obviously depending on someone’s personal situation).
Secondly, it’s how important the purchasing power of money is, and the impact this has on our potential FIRE date. It’s easy to get complacent with this while inflation plods along at less than 1.5% year after year. But if energy, fuel and food costs have just added £2-£3k to my annual expenses then at a 3%WR that’s an extra £66k-£100k I need to save to cover these core expenses. Ouch! Factor in the market falls too and it’s very easy for FI to suddenly feel a long way off again.
It’s easy to see why people give up or feel this FIRE lark is not achievable for a “normal” person, so never bother starting in the first place.
Guys, I went back and read @TA’s post, the ‘Coronavirus as told by Monevator commentators’! link! It’s fascinating on so many levels.
Please go back and add ripostes to what you said, felt and wrote at the time. So many of you left incredible insights. There are too many to draw attention to, but @TI – just amazing! You were a 10/10 coach, @zx measure in USD, anything else is a lie, but honestly too many smart, prescient comments to mention individually.
@TA it was such a great concept for an article and v valuable record!!
@SemiPassive, ‘I demand income/dividends now – yes!
I left a comment a couple of weeks ago about my response to the best market. I adjusted my annual portfolio from 4% loss to a 7% gain last FY. Obviously, I track reality, but demanding a basic return for risk is a form of defiance. And if I can’t achieve this ridiculous low bar, I would act on this information and make better investment choices.
I did this over C19 and my portfolio the following year returned 20+%, which returned my ongoing returns to < 7%+.
I only do this for the retirement/superannuation component of my portfolio. And yes, of course I pay attention and adjust for currency and inflation.
The markets are meant to work for me not vice versa. So far, they have.
@London a long time ago — Cheers, it was indeed a great idea of @TA’s… I was skeptical at the time as it felt like we’d been overwhelmed in the proceeding weeks, but in retrospect it was both a useful summary of shifting sentiments and, as you say, is now a really interesting historical document.
Incidentally if anyone looks back and sees they wrote something that they wish they hadn’t, I say go easy in yourself. It was a mad time to live through, let alone invest through, and none of us got everything right. Just getting the basics right was job well done! 🙂
There are bear markets and then there are bear markets, secular bear markets that end the long term frenzied up cycle and cyclical bear markets that are pauses in the long term up cycle.
Everyone will have a different opinion on which one is which but it interesting that the longer bear markets (10, 7, 9, 1, 2 on the first chart) have occurred during secular bear markets; 1929-1947, 1965-1982, 2000-2017. The rest have been cyclical bear markets. The average is roughly two years, but a pause for two years is very different to a severe drop, and will definitely feel so economically for most people (rising unemployment etc).
So where are we now? I believe that this is a pause in a secular bull market, a bit like 1987 to 1990, although not accompanied by a slumping housing market, that would mean 10+ years of bull market ahead of us until the secular blow off top.
Some charts to illustrate the above are here:
https://twitter.com/17_6YrStockCyc/status/1396116805974962176?cxt=HHwWgMC50dG1gOAmAAAA
@ Whettam – agreed that conventional bonds haven’t helped this time around and were never going to when inflation got out of control.
What’s become apparent from quite a few voices in various comments threads is that many people expected bonds to automatically work when they quite often don’t. They’re an imperfect hedge to say the least.
And the losses inflicted by long-dated inflation-linked bonds as real interest rates rose are a real shocker for many.
I don’t know if it’s because of the oversimplification of investing education, or it’s indicative of insufficient research, or simply because bonds are so damn counterintuitive.
Short index-linked bonds look OK, but one of the few YTD bright spots in my portfolio is a FTSE 100 ETF clocking in at 3.65%. About time it pulled its weight!
Still, after inflation everything looks awful so I have to cast my eyes at the 10-year annualised returns for solace 🙂
@ London a long time ago – cheers! It was a labour of love putting it together. Especially in the teeth of TI’s outright scepticism. There’s nothing like hearing he’s a 10/10 to soften his ‘tude 😉
On bear markets – it’s pretty amazing how many articles there are out there that gloss over how long recovery can take. I guess it doesn’t make sense for a financial services provider to scare the horses.
Don’t know why, but I’m surprised at the lack of comments with this article, TA must of nailed it especially around how long the actual recoveries can take, for sure I’ve bookmarked this one for guidence for when the bear shit hits the fan 🙂 now, later, next year…?
Is a further element that people project an annual return in their financial plans that is also missing so return to the original £100k is only part of the story ?