Bear Market

A bear market is a sustained fall of 20 percent or more from a recent high, driven by recession, rate rises or a repricing of whatever the optimism had built. The ASX has run through several: the GFC took the index down by more than half between 2007 and 2009, early 2020 took a third off in five weeks, and 2022 subtracted roughly a fifth. A fall of 10 to 20 percent is a correction; the bear market is the bigger sibling.

The arithmetic is the part that changes behaviour. A 50 percent fall requires a 100 percent rise to recover; a 33 percent fall requires 50 percent. The asymmetry is why the fall hurts more than the recovery pays, and why the balances that sold near the bottom missed the climb - the volatility entry covers the daily swings, and the behaviour is the real cost. The market has recovered from every Australian bear market; the portfolios that sat through them did too.

Walk the anatomy. Earnings expectations fall, the cash rate rises, or the optimism reprices - and the selling feeds on itself as margin calls and redemptions force more selling. The media coverage turns, the inflows of the bull market reverse, and the index falls faster than the economics alone justify. The ASX fell roughly a third in five weeks in March 2020 - the economics did not change that much in five weeks; the selling did.

The recovery arithmetic is the second mechanism, and the asymmetric one. A portfolio that falls 50 percent needs 100 percent to return to its high; one that falls 33 percent needs 50 percent. The ASX recovered its 2020 drawdown inside a year, and its 2007 high took over a decade - the recovery time is never knowable in advance, which is why the cash buffer matters. An investor who sold in March 2009 waited years to re-enter at higher prices; the investor who held recovered with the market.

The sequence risk is the third mechanism, and the retiree's version. A portfolio drawing $25,000 a year through a 30 percent drawdown sells assets at the bottom to fund the income, and the withdrawals compound the loss - the balance that would have recovered now shrinks permanently. The first years of retirement are the dangerous ones, and the emergency fund entry covers the buffer that funds the gap instead of the portfolio. Younger investors have the opposite advantage: time, and contributions buying through the fall.

For an Australian reader, the bear market is the reason the allocation decision exists at all. The ASX has recovered from every one of them, and the long-run return with dividends reinvested is roughly 8 to 9 percent - both facts are true at the same time. The risk tolerance entry sizes the allocation to the drawdown you can actually sit through, and the drawdown risk calculator puts numbers on it. MoneySmart guidance treats market falls as part of investing, not a failure of it.

A colleague named Brent (yes, that Brent) sold his entire portfolio in November 2008 because the balance kept falling. The index bottomed in March 2009 and recovered over the following decade; he re-entered in 2012, at prices well above the ones he sold at. The bear market was survivable; his behaviour was not. The highest-leverage thing most Australians can do is size the allocation so the worst realistic drawdown is survivable, keep three to six months of essentials in cash, and hold the rest through the fall.