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March, 2010
Bear Market Recovery is Quicker with Small and Value Stocks

Stock market downturns-from average bear markets to deep downturns like in 1929 and 2008 are a way of life for investors. Since 1926 there have been 23 separate bull and bear markets (bear markets are bad, bulls are good). The average bear market lasted for 11 months and the average bull market lasted for 32 months.

However the great bear markets were worse in all respects - they lasted longer and more money was lost, with a minimum decline of 40 percent for the Standard & Poor's 500 Stocks Index, says Scott A Leonard, an investment manager in California who published his research on bear markets in The Journal of Financial Planning.

Time to recovery

Leonard studied the three great bear markets that have occurred since the end of the Great Depression: the final Depression bear market that ended in April 1938; the crash around the oil embargo of 1973-74; and the dotcom stock bust of 2000-02. (The credit crunch bear of 2008 is the latest big bear). He found that a diversified portfolio had fully recovered to its pre-crash value within three to five years. The fastest recovery occurred in portfolios that held more small stocks, because they reaped outsized returns after each crash.

1939 aftermath

The last bear market for the Great Depression resulted in a 50 percent decline in stock prices over 13 months ending in April 1938. Within five years, three of the four classes of stock studied by Leonard had recovered: small stocks, small value stocks, and large value stocks had fully recovered, while the large stocks in the S&P 500 index trailed slightly behind.

The stock market lost 43 percent during the bear of 1973-74, a period of high inflation, an oil crisis, and the end of the Vietnam War. Within three years everything but the S&P had recovered - small value stocks in-creased by almost 230 percent in that period.

The dotcom bust lasted for 25 months, ended in September 2002 and taking stocks down by 45 percent. All four classes of stock had fully recovered five years after the bear ended. Leonard recommends owning small and value stocks during and after major bear markets in order to speed portfolio recovery.


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Kelly C. Ruggles is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles is the author of "The Financial Playbook" for Retirement

Kelly C. Ruggles does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.