Bull vs Bear

The table below sets out major moves in the ASX All Ordinaries Index since 1969.

So what important points can you glean from the above table?
- Over the last 48 years, bear markets have been in operation for around 13–14 years.
- Strong bull markets where overall gains exceed 100% tend to be followed by damaging bear markets where the peak to trough decline exceeds 40%.
- Depending on your timing, there can be significant time periods where the net capital gain is negligible. From the peak in 1969 to the low in 1982 (13 years) and from the peak in 1987 to the low in 2003 (15 years) are two such periods.
- The two longest bull markets were from 1974 to 1982 and 2009 to 2017 to date, both lasting 8 years although the current bull market is ongoing. Given its duration, the risk to the current bull market must be heightened.
- The two longest bull markets emanated out of oversold markets in 1974 (Global recession and stagflation) and 2009 (Global Financial Crisis low).
History tells us that the probability of a major decline between now and 2020 is extremely high, but there is no way to know what will be the flash point for a major move, or what combination of events will lead to a gradual decline.
With cash returns extremely low (term deposit rates around 2.5%), “cashing out and waiting” should not be a consideration. But sitting with portfolios that will track indexes and saying to yourself “it will be ok in the long term” or “if I don’t sell then it doesn’t matter” will not ease the pain during tough times.
The best way to play this potential risk, while still being invested in Australian shares, is to use investments that are either:
- index-unaware and just buy good businesses irrespective of where they sit in an index or what weighting everyone else thinks you should have, or
- positioned to benefit no matter which way an index or stock moves. These investments can “short” the index or specific stocks so counter “long” positions, with a focus on an absolute return (with the target return based on cash plus a set margin.
Thanks to Pentalpha Investment Management for most of the content of this article.
Any financial product advice, comments or information displayed is of a general nature only and should not be interpreted as a recommendation of any products or strategies referred to. It has been prepared without taking into account the particular objectives, financial situation or needs of any individual and therefore you should not act on any advice without considering the appropriateness of the advice in regards to your objectives, situation and needs.
