By Julia Lee

It has taken 15 years for the tech focused NASDAQ to regain most of the ground it lost during the tech wreck of 2000. After gaining 24% in the first three months of 2000, the index managed to lose 51% in the remaining nine months of the year. The NASDAQ is now within striking distance of the all-time record high seen on 10 March 2000 at 5132 points.

For Australian investors wondering how long it will take for the Australian sharemarket to regain the ground lost during the Global Financial Crisis, are there any lessons that we can find by looking back in time? Let’s start by looking at past bear markets and how long it has taken for the market to regain lost ground.

While it can be daunting to examine bear markets, the sharemarket is one of the most attractive assets to help accumulate wealth over the long term.

Looking at the past

Looking at bear markets since 1970, there are seven instances of the market losing more than 20% from peak to trough. The average recovery time of the last six instances is three years and three months.

The bear market of 1973 was the largest percentage decline for the Australian sharemarket of the seven bear markets. It experienced a fall even greater in percentage terms than the decline of the Australian sharemarket in the Global Financial Crisis (2007). The bear market of 1973 saw the market falling 60% from the peak in January 1973 to the bottom in September 1974. It took more than 6.5 years for the market to return to the previous high.

For the 1980’s crash, the market fell 41% from the peak on 17 November 1980 at 769 points to the bottom on 8 July 1982.  The market managed to regain ground back to the previous high on 13 Dec 1983; more than three years after its peak.

The 1987 crash was remarkable in that it took the longest time for the market to recover to the previous high but the initial fall occurred in the shortest amount of time. The market peaked at 2383 points on 21 September 1987. It bottomed less than two months later on 11 November 1987, after the crash of “Black Friday”. It would take more than nine years before the market managed to regain the ground lost during the 1987 stockmarket crash. The recovery was complicated by “the recession that we had to have” in the early 1990’s.

During the recovery from the 1987 stockmarket crash; 1987-1996, there was another bear market which ran from 1989-1991. From the peak on 30 August 1989 to the bottom on 17 January 1991, the Australian sharemarket lost 33%.

1997 was the Asian Currency Crisis. The Australian market lost 21% in just over a month. The market peaked on 23 September 1997 and had bottomed just over a month later on 28 October 1997. It’s the shortest bear market that this article covers. It also took the shortest time to recover to the previous peak, managing to do so in half a year.

Australia managed to avoid a bear market during the tech wreck in 2000. The economy also managed to avoid a recession in the early 2000s, which plagued the United States and European Union. Despite this, the Australian sharemarket managed to enter into a bear market with a decline of 23% in 2002.

The final bear market covered is the 2007 Global Financial Crisis (GFC). The market peaked on 1 November 2007 and bottomed on 10 March 2009. It’s been more than seven years since the GFC began and the market still hasn’t managed to regain the high at 6873 points.

Risk versus patience

While long term investors are often sold the line that it’s time in the market not timing the market that’s important, the recovery from bear markets can often last longer than most investors’ appetite for risk. The 1987 stockmarket crash took almost a decade to recover from, while the 2007 GFC has already seen more than seven years pass without the previous peak being reclaimed.

The lesson from examining the past must be that it is important to spend time in the market and to time entry and exit points to the market. Despite time in the market being important, equally or perhaps even more so, risk management has a big impact on portfolio returns. Good risk management should incorporate how to manage losses with tools for risk management such as stop losses, put options or alerts to help cut losses early. Technical analysis may also provide warnings that the market may be about to, or has peaked. These tools can mitigate or help manage losses.