If a Bear Market Is Coming, History Says This Is How Long It Could Take to Recover

When the S&P 500 (SNPINDEX: ^GSPC) reaches a new high, it's tempting to wonder how much further it can go. And if a bear market -- a drop of 20% or more -- is coming, how long might it take for your portfolio to recover?

First, let's get one thing out of the way: A record high is not, by itself, a reason to expect trouble. Investment firm Dimensional Fund Advisors looked at S&P 500 data from 1926 through 2022 and found that a year after setting a record, the index was higher 81% of the time. It gained an average of nearly 14%.

Of course, bear markets still happen. So what should you expect when one does?

How long have bear markets taken to recover?

According to research by Yardeni Research, the S&P 500 has fallen at least 20% on 11 occasions since 1957. By my count, it took about a year, on average, to reach the bottom.

There's quite a bit of variation within that average, however: the COVID-19 bear market reached its low in just 33 days, while the post-dot-com bear market dragged on for more than two and a half years.

Of course, reaching the bottom is only half the story. Using Yardeni's figures for when the index returned to a record high, I get an average of a little over three years for the round trip: from peak to trough, back to the previous peak.

Image source: Getty Images.

Once again, that hides a massive range: It took six months to recover in 2020. Full recovery took about seven and a half years from the market's peak in 1973.

I should note that those figures track the index's price. That means they don't include dividends, which would speed an investor's recovery, nor inflation, which would make getting back to the same value in real terms take even longer.

What should investors do with that history?

To my mind, the real lesson of history is that down markets happen, but they always reverse, and that over time, nothing touches the stock market for building wealth.

And while it may be tempting to sell when you sense a bear market coming, don't. Timing the market is extraordinarily hard, and you're just as likely to miss out on more returns as you are to protect your downside. Bear markets actually make great buying opportunities.

Of course, money you'll need within a few years generally shouldn't be in stocks. You don't want to be forced to sell shares after a 25% drop. But for investments you can leave alone, a steady hand over the long haul will always be the winning formula.

Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.