March 6, 2001

Getting Going

Long-Term Investors
Welcome the Bear

Stop worrying, already.

Yes, we are in a bear market. But the worst is probably over. No, there's no way of telling how quickly stocks will snap back. But if you're regularly adding to your stock portfolio, you'll pray for a slow recovery.

Got that? Here is a little elaboration:

Bear Necessities: In one of the greatest market massacres ever, imploding technology stocks have driven the Nasdaq Composite Index a staggering 58% below its March 2000 peak. But at the same time, the Dow Jones Industrial Average has slipped just 10% from its all-time high, far less than the 20% decline needed to qualify as a bear market.

So which is it, market bloodbath or modest reversal? I believe investors should take their cues from the much broader Wilshire 5000, which includes almost all U.S. stocks. The Wilshire 5000, which peaked last year at 14751.64, closed Monday at 11434.54. That puts U.S. stocks 22% below their all-time high. Sure sounds like a bear market to me.

The Wilshire 5000 hit its peak on March 24, 2000, which means the current bear market has dragged on for almost a year. That might seem agonizingly long, especially when compared with the brutally quick declines of 1987 and 1990. According to the Leuthold Group in Minneapolis, 1990's 20% tumble took just three months, while 1987's 34% battering was compressed into four months.

But those two bear markets were unusual. Since the Second World War, Standard & Poor's 500-stock index has suffered 10 declines of 20% or more. During those 10 bear markets, stocks -- on average -- shed 29% over 15 months.

Sound unnerving? There's a silver lining. It's entirely possible that share prices will keep falling. But if the current slump turns out to be anything like the average bear market, the worst may already be behind us.

"We're assuming that a lot of the damage has been done, and that we're a lot closer to the bottom than to the peak," says Andrew Engel, a senior research analyst at Leuthold. "It's time to start accumulating stocks, rather than being a seller."

Uncertain Recovery: How quickly will stocks bounce back? From the bottom of the last 10 bear markets, it took 19 months, on average, for the S&P 500 to recoup its bear-market losses. That average, however, disguises a huge spread.

Following the 1980-82 bear market, investors had to wait just five months to recover their losses, according to the Leuthold Group. But after the 1973-74 bear market hit bottom, it was almost six years before investors got back to even.

These figures exclude dividends. When those are included, the recovery time was often substantially shorter. Nonetheless, bear markets usually aren't followed by the sort of quick bounce back we saw in 1982 or 1990-91.

"Bears are typically a prolonged, painful experience," Mr. Engel says. "When you start seeing markets like today's, where you have the Nasdaq down 50% or more, you get people stepping back and saying, 'Do I really want to be in a market like this?' But investors should stay the course at this point."

Extended Shopping Hours: After all the financial pain, most folks are no doubt hoping for a rapid market recovery. But for many investors, a prolonged bear market would be far more financially rewarding.

"For somebody who is putting money in month by month, now you're picking up shares at cheaper prices," says Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School. "This is good news for long-term investors. The longer it goes on, the better off you are."

A protracted bear market is rougher on retirees. But if you are reinvesting your dividends back into the market or willing to boost your stock exposure, you could still benefit from the market decline.

All this, of course, assumes that your stock portfolio will eventually recover. But will it? If you are among those who bet heavily on technology stocks, it could be a long wait.

Consider the record of Fidelity Select Technology Portfolio. During the technology boom of the early 1980s, Fidelity Select Technology was possibly the country's hottest fund, skyrocketing 162.1% over the 12 months ended June 1983. But in mid-1983, technology stocks went into rapid reverse, driving the fund down 24.7% over the next 12 months.

And the pain didn't stop there. Through the rest of the 1980s, Fidelity Select Technology gained just 0.6% a year, while the S&P 500 climbed at a 20.8% annual clip, according to Chicago researchers Morningstar Inc.

This time around, maybe technology stocks will enjoy a faster snapback. But to be sure of benefiting from any stock-market rebound, you really need to hold a broadly diversified stock portfolio. Currently, technology shares account for 22% of U.S. stock-market value. Got a lot more than that in tech? Maybe it's time to spread your stock bets a little wider.

"Investors feel that if they sell technology now, they'll be selling at the bottom," notes Pittsburgh investment adviser Roger Gibson. "But what's past is past. Ask yourself this question: If I started today from scratch, what sort of portfolio would I hold? The answer is, you're not going to be 100% technology."

Write to Jonathan Clements at jonathan.clements@wsj.com¹