Bear Markets Are the Price of Admission

There is a scene in investing that has played out in my office many times over the years. A client — often someone who has been calm and disciplined through years of steady markets — sits down and says something like, "This time feels different." The headlines are alarming. The world seems genuinely dangerous. And the question underneath it all is: should we do something?

This quarter, that feeling is understandable. The conflict in the Middle East has escalated significantly. What began as a long-running proxy war between Israel and Iran has become a direct military confrontation, with strikes on Iranian nuclear facilities and the kind of regional uncertainty that makes the front page every morning. Add to that the ongoing noise around tariffs and trade, and it is easy to see why investors are on edge. But I want to offer a different frame for thinking about all of this.

The S&P 500 has produced an average annual return of roughly 10% over the past century. That is a remarkable number. But it is also a number that comes with a very specific and often uncomfortable set of conditions attached to it. The average intra-year decline — the largest drop from peak to trough within a single calendar year — has historically been around 14%. Even in years when the market ends positive, investors typically have to endure a double-digit pullback at some point along the way. As the chart below shows, over 46 years of data, markets finished the year in positive territory 35 times, even though the average intra-year drop was over 14%.

Bear markets — declines of 20% or more — happen roughly every five years on average. Corrections of 10% or more come around even more frequently, typically every 12 to 18 months. These are not aberrations. They are the normal terrain of long-term investing.

The average 10% annual return doesn't come in spite of the volatility. It comes because of the volatility.           

The return is essentially the market’s compensation to investors willing to endure the discomfort that some people cannot stand. If investing felt easy and safe all the time, the returns would look like those of a savings account.

When military conflict breaks out, the instinct is to sell. The logic seems sound: war is bad, instability is bad, therefore the market should go down. But the historical record is more complicated than that.

Markets declined sharply at the outset of World War II — and then rose dramatically as the industrial economy mobilized. The Korean War, the Cuban Missile Crisis, the Gulf War, the September 11th attacks — in each case, markets absorbed the shock and recovered, often faster than anyone expected. The great financial crisis of 2008-2009 had nothing to do with geopolitics, and the COVID pandemic of 2020 sent the market down 34% in 33 days. Yet in each case, patient investors were eventually rewarded.

The current situation in the Middle East is serious. It is also true that markets have a long history of digesting serious things and moving forward. The world's great companies do not stop serving their customers, innovating, or generating earnings because headlines are alarming. In fact, some of them — defense contractors, energy companies, logistics firms — may benefit directly from the very disruptions that seem so threatening.

The point is not that nothing bad can happen. The point is that nobody — not professional investors, not economists, not the most sophisticated analysts on Wall Street — reliably knows in advance how geopolitical events will translate into market outcomes. If we could consistently predict that relationship, there would be no risk premium. The uncertainty is the price.

The temptation during volatile markets is to move to cash, wait for the dust to settle, and then get back in when things feel safer. This feels prudent. In practice, it is one of the most reliably wealth-destroying decisions an investor can make. The problem is not getting out. It is getting back in. Markets tend to recover in sudden, violent bursts. Many of the best single days in market history have come in the depths of bear markets, when the news was still terrible, and the future still looked bleak. Missing just a handful of those days over a decade can cut your long-term return in half.

The right response to market volatility is not inaction — it is purposeful action, taken not in reaction to headlines, but in alignment with your long-term plan. If your portfolio has drifted from its target allocation because stocks have declined relative to bonds, rebalancing back to your target is exactly the right move. It is uncomfortable because it means buying more of the thing that has gone down in price. But that discomfort is precisely the point — rebalancing forces you to behave the opposite of how your instincts are screaming at you to behave, and that discipline is what separates successful long-term investors from everyone else.

If you are still in the accumulation phase and contributing regularly to a retirement account, a down market is not a crisis. It is a sale. More shares at lower prices means more growth when markets recover.

And if you find yourself lying awake at night worried about your portfolio, that is worth a conversation — not because we need to change your investments, but because we may need to revisit whether your allocation truly reflects your tolerance for this kind of volatility. A plan you cannot stick with is not actually a plan.

Bear markets are not a sign that something has gone wrong. They are a feature of the investment landscape, not a bug. They are the price of admission for the long-term returns that build real wealth.

The world will always have something alarming happening in it. There will always be a reason, if you are looking for one, to move to the sidelines. The investors who have done best over time are not the ones who successfully predicted every crisis. They are the ones who understood that the crisis was already priced into the expected return — and stayed anyway. My prediction for the next market crisis is this: it will feel different from all the ones before it. And just like all the ones before it, the patient investor will be rewarded for not acting on that feeling.