How much did passive investors lose in the 1929-1932 bear market and how long did it last?
The chart below illustrates the need for an exit strategy. The Dow Jones Industrial Average peaked in September 1929 and did not find a bottom until July 1932; unfortunately the index had already lost 89% of its value.
BUT, THE 1929-1932 BEAR MARKET WAS UNIQUE, RIGHT?
All bear markets have unique characteristics, but they all share the trait of being very damaging to passive investors. As demonstrated in the cost justify fees FAQ, large drawdowns occurred in the 2000-2002 bear market. As noted in two other FAQs (smart portfolio and false diversification), even diversified portfolios got hit hard in the 2007-2009 bear market. Horrible bear markets have happened in the past and they will occur again sometime in the future. It is not a question of if, but only when. Being able to answer three major questions can help bring peace of mind for investors.
IF IT HAPPENED BEFORE, IT CAN HAPPEN AGAIN
In our lifetime, it is striking how similar the setups were in the 2000-2002 and 2007-2009 bear markets. The fundamental reasons for bear markets vary, but the market's migration from a confident data profile to a fearful data profile tends to be very similar.