This year is currently looking like one of the roughest ever for the stock market.
Through the first nine months of 2022, the S&P 500 index lost 23.9%. Only five full calendar years have produced worse returns: three years from the Great Depression, 2008 and 1974.
But if market history paints a dire picture for what's gone on so far this year, it also offers a silver lining for long-term investors. Bear markets like the current one tend to be short, and investors who keep their cool tend to make out alright.
That's what Charles Rotblut, vice president at the American Association of Individual Investors, pointed out in a recent tweet. "Not only is the current bear market well within the typical range of past bears, those who stick w/ their allocations get rewarded for doing so," he wrote.
The data he's referencing is from CFRA chief investment strategist Sam Stovall, who analyzed 13 bear markets — defined as a decline of 20% or more from market peaks — dating back to 1945.
The current bear falls under what Stovall calls "garden variety" bear markets — those that feature a stock market slide between 20% and 40%. The others he calls "mega-meltdown" bears, which saw drawdowns of more than 40%.
The latter sort are especially tough for investors, lasting for just short of two years on average, with an average decline of 51%.
The garden-variety bear is somewhat less intimidating. The average drawdown during these periods is 27%, and they tend to last for 13 months on average. And importantly for investors, it took only 27 months for stocks to return to their peaks after these down periods, on average. That compares with an average recovery time of nearly five years for the harsher bears.
Two years may seem like a long time to stare down red numbers in your portfolio, and five may seem like an eternity. But if you're invested for decades, a period of a few years is a blip.
More importantly, you'd be wise to add to your portfolio during down markets, rather than selling, says Rotblut.
"Have you ever looked at the chart and thought, 'I wish I bought that stock when it was down at this price?' Then why aren't you buying now?" he says. "No one knows where the bottom is, but we do know stocks are on sale right now."
The bottom of the market could be well into the future, and selling now before things get worse could, in the long run, boost your returns. But it would most likely be a mistake, experts say, for two reasons.
One: Even if you're right about the market going down further, selling now would require you to peg the right time to get back in in order to turn a profit. "If you're going to cash, what is your rule for getting back into the market? What are you going to use as your marker? And what happens if you don't act then?" says Rotblut.
Timing the market is extraordinarily difficult, and getting it wrong could cripple your returns. A $10,000 investment in a fund tracking the S&P 500 at the end of 2006 would have grown to nearly $46,000 by the end of 2021, according to Putnam Investments.
But subtract the 10 best days from that 15-year period, and the total declines to about $21,000. "Time, not timing, is the best way to capitalize on stock market gains," Putnam researchers say.
The other reason: Although past returns are no guarantee of future results, markets have historically rewarded investors for buying into the market after it's had the kind of slide investors have seen so far this year.
As measured by the Wilshire 5000 — a broad U.S. stock market index — the first nine months of 2022 rank among the worst 20 nine-month periods of the last half century, according to data from Compound Capital Advisors.
In all but one of those instances, the index logged a positive return in the one-year period following the nine-month decline, with an average return of 12%. Over the next three years, the index was positive each time, with an average gain of 41%.
Simply put in a tweet from Compound CEO Charlie Bilello: "Has selling AFTER large 9-month declines been a good strategy for long-term investors in the past? No."
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