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Real Data Shows What the Best Times to Be Bullish and Bearish Have Been

We know when investors are bullish the stock market tends to go up, and when investors are bearish it goes down. But have you ever wondered when the market was most bullish vs. when it was most bearish?

The answers might surprise you.

Bull and bear markets have ran for much longer cycles than just 1-2 years. It’s been the investors who’ve either held their stocks long enough or found ways to trade very long term trends that have done the best during extended bullish and bearish times.

bullish vs bearish chart

When people think about the bullish and bearish cycles of the stock market, we tend to fixate on the big events. The crashes. The year or two of terror. What we don’t understand is how deep and long these cycles really run, and what that means for the average investor.

Consider this set of stock market data from Sunguard Institutional Brokerage:

AVERAGE ANNUAL REAL RETURNS
–1882-1897 (15 yrs): 3.4%
–1898-1902 (4 yrs): 15.6%
–1903-1921 (18 yrs): 0.6%
–1922-1929 (7 yrs): 25.4%
–1930-1949 (19 yrs): 3.2%
–1950-1966 (16 yrs): 14.1%
–1967-1982 (15 yrs): 0.2%
–1983-1999 (16 yrs): 15.7%

You know how they say that most of the returns from the stock market come on the recovery of a bear market?

This data shows that pretty explicitly.

I see a big takeaway from this data that can help us rather than cause us despair. 

How Long Term Investing Can Do Well in Bearish AND Bullish Time Periods

The U.S. government defines a long term investment as a stock held for more than 1 year (for tax purposes). Lots of long term, value and buy and hold investors claim 5 or 10 years to really be a long term holding.

But look at the data again. Most of times of extreme bearish sentiment and terrible gains happened for about 15+ years

How we should really define long term investing should be 20+ years.

And it shows with some of the best investors who’ve been able to stick around through thick and thin. It’s only taken Warren Buffett 60+ (!!) years to build his millions into billions. 

So if we expect to build our own fortunes as well, we need to pull our head out of the waves and look towards the horizon.

While Buffett was an excellent stock picker, he was also always invested in the stock market one way or the other. Sure, the faces (stocks themselves) have moved around a bit, but that’s always been consistent. 

Because look again at the data.

Look how random the bullish vs bearish time periods are. It’s impossible to predict when the good times will start and stop, and sometimes they move on by really quickly.

How to Do Long Term Buy and Hold Correctly

Instead, you have to be invested the whole time– through the good and the bad. That’s why I track my Real Money Portfolio for 40 years.

I’m not trying to cash the portfolio out in 1, 5, or even 15 years. The valuable habit of investing should be pursued for a lifetime– and it turns out that doing this also gives you the greatest chance for the best results.

Even when I’m bearish on a stock and I sell it, that money is going right back into the market.

That’s perhaps one of its greatest features right there.

  • I know some of you have value investing in your blood and find it very difficult to put money into a stock when the market is generally overvalued.
  • I know some of you can’t stand the idea of putting money into stocks when the market looks like a bloodbath and the economy is sputtering.

Data like this really shows how we should be approaching the stock market.

Continue buying stocks and holding them for the long term. Because you don’t know how long the current market cycle will last. But if you’re along for the ride, you’ll profit in the end.

How Dividends Affect this Historical Market Data

The other key part to understanding how investors profit from the bullish and bearish long term stock market cycles is to examine how dividends affect results.

Here’s the dataset from above again (which included dividend reinvestment) but with a second column added (without dividends reinvested):

AVERAGE ANNUAL REAL RETURNS
–1882-1897 (15 yrs): 3.4% w/ reinvestment; -1.2% without
–1898-1902 (4 yrs): 15.6% w/ reinvestment; 11.8% without
–1903-1921 (18 yrs): 0.6% w/ reinvestment; -4.4% without
–1922-1929 (7 yrs): 25.4% w/ reinvestment; 19.3% without
–1930-1949 (19 yrs): 3.2% w/ reinvestment; -1.8% without
–1950-1966 (16 yrs): 14.1% w/ reinvestment; 9.3% without
–1967-1982 (15 yrs): 0.2% w/ reinvestment; -3.8% without
–1983-1999 (16 yrs): 15.7% w/ reinvestment; 12.1% without

Source: Sunguard Institutional Brokerage

What was shocking to me above everything was how much dividends enhanced returns during bullish time periods.

Obviously during long bear markets the dividends help because you actually get to make money. But wow, with an almost 4% difference each year these dividends make a HUGE impact.

Just how much a difference is 4%?

Consider investing $150 per month for 40 years, one investor (calls himself The Dividend Lover) gets 12% returns per year while the other investor (nicknamed Dividends are Boring) earns 8% annually. Here’s those results:

  • The Dividend Lover: $1,380,764
  • Dividends are Boring: $466,301

I’ll say it until I’m blue in the face and my fingers are falling off– investors NEED to be buying dividend paying stocks! Period.

If we’ve seen these averages for 100+ years, what makes you think that:

A) It’s going to change that much
B) You have the God-given talent to know which non-dividend stocks will be the exception to the rule

This is why I pose a strict restriction that I only buy dividend paying stocks. And I’ve written extensively about how I go about finding the best ones.

We really don’t know which stocks are going to be the best and which will be mediocre. But if you’re collecting and reinvesting dividends along the way… you’re already giving yourself a 4% annual advantage, based on 100+ years of data!

If that’s not encouraging, I don’t know what is.

The bottom line: I don’t see the idea of business and a marketplace ever ceasing to exist for as long as humanity lives. So I’m confident these bullish and bearish cycles will continue to repeat. I suggest you start thinking the same, and investing appropriately.