Since 1929, there have been 15 bear markets, averaging 20 months in length with an average decline of 39.4%. Leaving out the 1929 crash, the average decline was still 36%. The last two bear markets were among the worst ever, dropping 49.1% and 56.7%, respectively. Bull markets occur about 70% of the time, and bear markets occur about 30% of the time. A bear market has occurred every three to four years since 1900 with average declines of about 30%. The bear markets in 1987, 1990, and 1998 were the shortest, while the 1973–1974, 2000–2002, and 2007–2009 bear markets were the most devastating. So bear markets are frequent and the damage they can inflict in investor portfolios is severe.

No one can consistently predict the market’s future direction or performance with any degree of reliability. Of course, there have been isolated impressive stock crash calls by gurus in past years, but they failed to deliver on future calls. Moreover, each call was by a different guru. For example, the bear market calls of Marty Zweig and Elaine Garzarelli before the 1987 crash and Joe Granville’s call in the early 1970s were prescient. In early March 2009, Doug Kass of Seabreeze Partners said on CNBC that the generational stock market low for the year would occur within a few days, and he was correct. However, he also said previously that a low was at hand on earlier dates, but this time he was more definitive. He also called a market top for the year on August 26 for the rest of the year. As of December 4, 2009, he was wrong, as the market was approaching a high for the year.

Stock market history provides a perspective on what has happened in the past, but tells nothing about what to expect in the future. Just because the stock market returned an average of 9.6% from 1926 to 2008, going forward that provides no clue as to what the next few years or decades will bring. The best decades were the 1950s, with an average annual return of 19%, followed by the 1980s and 1990s at about 18% per year on average. The decade of 2000, where the market dropped an average of about 1.6% based on the S&P 500 Index through December 1, 2009, will be the worst decade, even worse than the 1930s. Sometimes the market does nothing for extended periods. Interestingly, during this decade, the MSCI Emerging Markets Index jumped an average of 8.2% a year. So you have to be on the lookout for leading markets. Look at the chart shown in Figure 1.3, which shows the lack of progress over 23 years in the Dow-Jones Industrial Average.

Buying-and-holding a diversified basket of 10 or 20 individual stocks is typically more risky than buying an index fund of the entire stock market, such as the Vanguard Total Stock Market (VTI) exchange-traded fund, because the risk is spread across thousands of stocks rather than a small number of stocks.

In bear markets, buy-and-holders lose money. In 2008, even with a diversified portfolio, investors had big losses. In most cases, a diversified portfolio of stocks and bonds (or mutual funds) provides a cushion against the drop, but the overall annual portfolio performance may still be negative. Even with a broadly based portfolio with a common mix of 60% stocks/40% bonds in 2008, using the Vanguard Total Stock Market (–37.04% total return) and Total Bond Market (+5.05%) ETFs as broad market indicators, their combined total return was –20.2%.

The larger the losses investors incur in a bear market, the longer it takes and the harder it is to get back even. For example, if investors lose 40% of their portfolio value in a deep bear market, say losing $40,000 on a $100,000 portfolio, then they will need a rise of $40,000, or 66.67%, in the portfolio to get back even. A percentage rise of this magnitude will typically take years to occur. Amazingly, a return of almost this magnitude occurred from March 9, 2009, through early December 2009 in many stock mutual funds, ETFs, and individual securities. This substantial return in such a short period is very rare and should not be considered the return of the roaring bull market of the 1980s and 1990s. It was simply a rebound from very depressed levels.