My expectation for losses in U.S. stocks during the next bear market is over 60%, which would take us back about twenty years and would require at least a 150% gain just to get back to even.

What impact would such a loss have on your portfolio? What impact would that have on your ability to retire or sustain your retirement lifestyle? Would any other financial goals be impacted? How about the toll on your mental health to see such a large chunk of your life savings wiped out.

Below is a chart showing hypothetical market declines from current levels, the date that lower level was first breached, time elapsed since the first breach, and the amount of subsequent gain required just to get back to even. This is a good spot to remind you that the Dow lost 89% in the Great Depression, the Nasdaq lost 83% in the Dot-Com Bubble burst, and the S&P 500 lost 55% during the Great Financial Crisis.

The implication is that even a run-of-the-mill 50% bear market would wipe away the last 19 years of price gains (not including dividends) bringing the S&P back to levels first seen in April of 1999!


Why do I expect over a 60% loss? The most reliable market valuation metrics are higher than they’ve ever been (including 1929 and 2000). So it’s reasonable to assume that the correction must also be quite severe. The more stretched valuations get, the greater the pent-up energy and the more severe the snapback must be to bring valuations back in line, much like a rubberband stretched to its limit.

The first chart below from John Hussman shows U.S. stock market valuations going all the way back to the year before the Great Depression. This valuation metric has about a 90% correlation to subsequent 12-year market returns.

You’ll notice valuations are more extreme today than ever before exceeding even 1929 and 2000. To believe current valuations do not indicate a high probability for a significant decline is to believe that “it’s different this time.”

I’ve also included a few other charts that support the thesis that markets are residing at historical extremes. These extreme valuations increase the probability of severe accidents / sharp reversals / and, potentially, the worst bear market in our lifetimes.

Successful investing is about managing around probabilities and avoiding the really large losses. Investors nearing retirement or recently-retired are the most vulnerable to a market shock. So investors in that window need to monitor and manage risk very carefully.





We don’t know if the record high from January 26th ($2,873) is the ultimate peak or if the market will make a new high before the next bear market begins. This is why we can’t know we’ve hit a peak until it is well in the rearview mirror.

It is very rare to go from a period of extremely low volatility and record highs straight into a severe bear market. Normally, you get smaller corrections, increasing volatility and “vibrations” or “tremors” leading up to the main event. However, anything is possible. I certainly wouldn’t gamble with my nest egg or my retirement. I don’t want my clients being the greater fool buying stocks at the end of an extreme bull market.

In either case, the remaining upside left in the market is likely small relative to the potential downside at this point. Investing is about probabilities, risk management and avoiding the really large losses. As Warren Buffett says, “Be fearful when others are greedy and greedy only when others are fearful.” It’s no surprise, then, that Warren Buffett has built up more cash than ever before because he’s not finding attractive investment opportunities.

Let me know if you have any questions on anything discussed here, or if you’re interested in this strategy as a compliment to your other assets. I offer complimentary portfolio reviews to help identify risk and expenses within the portfolio.

Kindest Regards,




Disclosures: Past performance is no guarantee of future results. Much more research and due diligence should be performed on any asset than just these charts. This is not intended is individualized investment advice but as general education. Always consult your advisor who thoroughly understands your unique circumstances, goals, expertise, and risk tolerance. Data used herein from third-party sources generally believed to be reliable but accuracy cannot be guaranteed.


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