Robin Bowerman, Head of Retail at Vanguard Investments Australia.
Robin Bowerman, Head of Retail at Vanguard Investments Australia.

What happens next?

WITH the S&P/ASX200 hitting an 18-month high on April 7 – marking a rebound of almost 60% from its bear market nadir in March last year – numerous investors would be asking themselves whether this pace of market recovery can continue.

The strength of the rebound underlines the high cost that investors can pay if they attempt to time the market – trying to pick the best time to buy or sell – and miss the beginning of a new bull market.

As Smart Investing has written many times, even the most-experienced investors rarely succeed in consistently timing the market.

There is now plenty of cash reportedly on the sidelines held by investors who are hesitating about when to buy back into shares.

Earlier this year, head of investment strategy and chief economist of AMP Capital Investors Shane Oliver used statistics from his own firm and Bloomberg to produce a fascinating table looking back over the 11 bull markets (excluding the last) in their first and second year after their bear market lows.

These statistics date back to the early fifties, taking in the first post-war bull market.

In short, the market performance in the second year after a bear market low was, on average, much more subdued than in the first year.

“The average gain in the first 12 months from a bear market low during the post-war period is 28%,” Oliver wrote. (Again, the average excludes the first-year rebound from the last bear market, which was the second strongest over the period examined.)

“But the average gain in year two is just 6%, although with a broad range of between minus 25% to plus 24%.”

The first year after the January 1970-November 1971 bear market saw a 49% return followed by a minus 25% in the second year.

Again, these figures underline the risks of attempting to time the market.

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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.

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