This analysis was spurred on by someone who asked if it was better to ride out a bear market, or sit it out.
A bear market is generally defined as a drop of 20% or more in the major indeces. Sitting out a bear market therefore implies that the portfolio took that initial drop of at least 20% that created the bear market, and the question is, what should be done at that point?
In the table below, for each year 2000 – 2016, I calculate the return on investments in the NASDAQ ETF QQQ two ways. First, all funds are always invested (i.e., ride it out). Second, I calculate returns assuming funds are completely withdrawn from the market whenever there has been a drop of 20% or more during the past 200 trading days, otherwise funds are completely invested (i.e., sit it out).
|Year||Always In Market||In Market Exclude Periods of 20% Drops Within 200 Trading Days|
Anyone who was an investor during 1999 – 2002 remembers the carnage of the ‘dot-com’ crash, and that’s reflected in the ‘ride it out’ strategy. The initial drop doesn’t show up in the ‘sit it out’ strategy because the first big drop occurred in 1999 (QQQ didn’t trade for the entire year, so that year isn’t included in the table).
It’s unfortunate that there wasn’t a full year of data for QQQ for 1999 so it could be included in the table, as this makes ‘sit it out’ look better than it should during this period. Accepting, though, that ‘sit it out’ did indeed suffer that initial 20%+ drop just as ‘ride it out’ did, for the next three years sitting it out was a better choice, even though that meant missing out on some of the rebound of 2003.
Again, for 2008 – 2009, we see that ‘ride it out’ was quite a wild ride. The overall net return during this period on ‘sit it out’ wasn’t much different, but the volatility was significantly less.
For the other years there was no difference between the two strategies, since there were no bear markets.
This is an analysis of past performance, but past performance is not a guarantee of future performance.
Comments / Questions: joseph AT StockMarketMovement.com