It’s no news to you that the global and domestic share markets have been and are currently experiencing a downturn. We are in what is known as a bear market. While there is no universally agreed upon definition of a bear market it’s commonly defined as a market which has a number of consistently falling prices over a 2 month period with an overall drop of 20% or more from the immediately prior high. The Australian stock market is well and truly in the midst of a bear market as in the 13 months to 30 November 2008 the market declined from its November 2007 high by 42% (based on movements in the S&P/ASX 200 Accumulation Index).

This tumbling of prices is not a new phenomenon. Based on an analysis of the S&P/ASX 200 Accumulation Index conducted by Zenith Investment Partners, the Australian share market has experienced 5 other bear markets since the beginning of 1970, with duration ranging from 2 months to nearly 3 years (32 months), or an average of 16 months. The recovery period, or time it took for the market price to reach a point higher than the high immediately prior to the bear market, was generally twice as long as the duration of the bear market -on average, 33 months.

At their lowest point during the bear market, prices fell on average by 37% of the previous high with the greatest fall being 55% from January 1973 to September 1974, and 50.1% from September to November 1987. Whilst we still don’t know when our current market slump will reverse, our bear market is so far positioned as the third worst since the early 70s.

While it can take some time to regain previous highs and it is possible there may be further falls, Zenith found once the share market had hit the lowest point of its bear market, market returns over the next 3 years were on average 62%, or 17.4% per annum. This means that not only are stocks currently much cheaper, but there is also a lot of potential for gains upon market recovery.

Yet interestingly, the bulk of this return, 28%, was gained in the first 6 months. This highlights the risk in attempting to time entry and exit points in the share market as, if an investor were to sell their shares and temporarily hold cash, then bought 6 months late and missed the return of 28% in the initial 6 months of recovery, they would gain a dramatically lower return of 35% rather than 62%.

Attempting to predict the exact bottom of the bear market means potentially foregoing a large part of the inevitable market recovery. It makes more sense to take a long term view when investing in the stock market and to regularly add to your investment. This averaging-in approach to investing may be worthwhile for those of us looking at reducing our exposure to further market falls.

Over the last 50 years share markets have on numerous occasions dropped by 20% or more, but long term the trend remains positive with shares providing better long term returns than most other assets. Despite the possibility of further drops in share prices, those wanting to know when the best time is to buy shares should consider averaging in over the next 6 months rather than attempting to correctly predict the exact bottom or beginning of the recovery period following the current bear market.

If you are interested in obtaining more detail on the issues discussed above, please contact Matthew Schlyder on 07 3833 3999.