“The Only Thing We Have to Fear”: Why You Shouldn’t Worry So Much about Market Drops

Readers of a certain age—or those who have studied history—may remember the source of the quote in the title of this article. These famous words were spoken by President Franklin D. Roosevelt in 1933, near the beginning of his first inaugural address. At that time, the country was feeling the first shocks of what would become known as the Great Depression.

Why do I bring up these uncomfortable facts? Because Roosevelt was right, especially when it comes to the fear many investors feel when they think about falling financial markets. This fear has a biological basis, of course; we have evolved to concentrate more on potential dangers than on potential positives. After all, it only takes one overlooked bear, hiding in the bushes, to create some pretty serious consequences. So, we humans tend to focus more on what could go wrong than what is likely to go right.

Let’s get one fact out in the open: market drops happen. We saw a very abrupt one in Spring 2020, and even though we don’t like to think about it, there is another one in our future. We don’t know when, and we don’t know how much it will fall, but the market is going to drop again. You can count on it.

But that is not a cause for alarm or for running to the exits. Nor is it anything new. On average, we have seen a bear market (defined as a drop of 20% or more) about every two years since the 1950s. But the other side of that equation is that an average bull market lasts about three times longer (31 months) than the average bear market (10 months).

Let’s look at this another way. Consider three investors, each of whom invests $2,000 per year for the 20 years, 1993–2013 (including the 2008 crash and Great Recession). One of them has absolutely perfect timing: she buys at every low point in the market (by the way, if this were a real person, I would want to have her manage my money—except that nobody has ever had perfect timing). The second investor avoids the stock market entirely and only invests in Treasury bills—the safest of the safe. And the third investor has the lousiest luck of all: he buys at every market high. Take a look at how they did over the 20 years:



SOURCE: C. R. Schwab/Riepe

Remember: each investor has put a total of $40,000 into the market over a 20-year period. Ms. Perfect Timing more than doubled her money, earning a return of about 118%. Treasury Bill Buyer has increased his stake by $11,291, for a return of about 28%. And what about Mr. Bad Luck? He has earned $32,487 on his $40,000 investment, a return of about 81%. Not bad, considering he bought every high in the market for 20 years.

The moral of the story is that over the long haul, there is no better wealth generator than the equity markets. Price fluctuation—including the periodic bear market—is to be expected. But also to be expected is the long-term upward trend that the markets have exhibited for more than 100 years. Don’t let the fear of the occasional bear market drop keep you from enjoying the benefits of the more common—and longer-lasting—bull market expansions.

As a fiduciary financial advisor, I help family stewards and other clients make smart decisions for managing, preserving, and growing their wealth. To learn more about how seasoned investors approach the financial markets, click here to read my white paper, “The Informed Investor.”


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