Infographics
How Experts Think About Bear Market Opportunities
This infographic is available as a poster.
How Experts Think About Bear Market Opportunities
Today, the majority of Americans are worried a bear market is looming.
The good news: there are silver linings. Bear markets can present bargains for investors, thanks to inefficient pricing and fear in the market. Going further, many investing greats have made key investments during market downturns including:
- Warren Buffett: Automotive sector during the 2008 Global Financial Crisis
- Shelby Davis: Financial sector during the 1997 Asian Financial Crisis
- Peter Bernstein: Gold during the 2000 Dot-Com Crash
In this infographic from New York Life Investments, we show four quotes on bear market opportunities and the data behind their insight.
How Experts Think About Bear Market Opportunities
When faced with the challenges of a bear market, how do experts respond?
1. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
— Warren Buffett, CEO of Berkshire Hathaway
Just like a bargain on socks may be an opportunity for buyers, a bargain on stocks is an opportunity for potential upside. In fact, the S&P 500 Index has seen double-digit gains 85% of the time after extremely pessimistic sentiment since 1987.
Investor pessimism can be measured by a ‘bull-bear spread’. This is based on an AAII survey that measures investor expectations for the market in the next six months. It is calculated by taking the percentage of investors who are ‘bullish’ on the market minus those who are ‘bearish’.
For example, in the week of April 29, 2022:
- Bullish: 16.4%
- Bearish: 59.4%
- Bull-Bear Spread: – 43
Here’s how the S&P 500 Index performed after periods of extreme investor pessimism:
| Date | Bull-Bear Spread | S&P 500 Index 12-Month Return |
|---|---|---|
| 10/19/1990 | -54 | 26% |
| 3/6/2009 | -51 | 67% |
| 10/5/1990 | -44 | 22% |
| 9/21/1990 | -43 | 25% |
| 11/16/1990 | -43 | 21% |
| 4/29/2022 | -43 | ? |
| 8/17/1990 | -41 | 18% |
| 1/11/2008 | -39 | -36% |
| 3/14/2008 | -39 | -41% |
| 8/31/1990 | -38 | 23% |
| 2/21/2003 | -37 | 35% |
| 10/16/1992 | -36 | 14% |
| 7/9/2010 | -36 | 25% |
| 9/14/1990 | -35 | 21% |
| 10/26/1990 | -35 | 26% |
| 2/20/2009 | -35 | 44% |
| 4/12/2013 | -35 | 14% |
| 12/21/1990 | -34 | 17% |
| 7/21/2006 | -34 | 24% |
| 1/25/2008 | -34 | -38% |
Source: Bloomberg, 5/12/22
As the above chart shows, investor pessimism is at its highest in 20 years.
Instead of thinking of how bad the market is doing, investors may be better of thinking of the market as being significantly less expensive.
2. “History provides crucial insight regarding market crises: they are inevitable, painful, and ultimately surmountable.”
— Shelby Davis, founder of Shelby Cullom Davis & Company
Bear markets hurt. On the bright side, they only account for 29% of the market environment, with bull markets making up the lion’s share (71%). What’s more, stocks have spent the vast majority of time at or near their all-time highs.
| Market Environment | Description | % of Time in Market Environment |
|---|---|---|
| All-Time High | Stock market hits all-time high | 35% |
| Bull Market Dip | Stock market falls under 10% from all-time high | 33% |
| Bull Market Correction | Stock market falls over 10% but less than 20% from all-time high | 3% |
| Bear Market Drawdown | Stock market falls over 20% from peak to trough | 10% |
| Bear Market Recovery | Time it takes to reach next all-time high | 19% |
Source: Morningstar Direct, PerformanceAnalytics, UBS 4/30/2022. Based on monthly returns from 1945.
Overall, stocks have spent around two-thirds of the time at or near all-time highs.
3. “The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes.”
— Peter Bernstein, economist and financial historian
To avoid falling for the behavioral pitfalls of a market cycle, investors can identify key macro indicators of each stage. Below, we show the economic indicators and how they associate with each type of market cycle.
| Market Cycle | Monetary Policy Shock* | Consumer Sentiment | Employment | Sales | Purchasing Managers Index (PMI) |
|---|---|---|---|---|---|
| Bull | Positive | Positive | Positive | Highly Positive | Highly Positive |
| Correction | Positive | Negative | Positive | Negative | Negative |
| Bear | Positive | Highly Negative | Highly Negative | Highly Negative | Highly Negative |
| Rebound | Highly Negative | Positive | Negative | Negative | Negative |
Source: Goulding, L. et al., May 2022. *Represents an unexpected move in monetary policy.
As the above table shows, bear markets are associated with low consumer sentiment, high unemployment, low corporate sales, and weak manufacturing performance—with a high number of macroeconomic shocks.
4. “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
— Winston Churchill, former Prime Minister of Britain
Just like bear markets can stoke investor uncertainty, rising interest rates can cause stock market disruption. However, since 1954 the S&P 500 Index has returned an average 9.4% annually during Fed rate hike cycles.
| Fed Rate Hike Cycle | S&P 500 Index Annualized Total Return |
|---|---|
| Aug 1954 - Oct 1957 | 14% |
| Jun 1958 - Nov 1959 | 24% |
| Aug 1961 - Nov 1966 | 7% |
| Aug 1967 - Aug 1969 | 4% |
| Mar 1972 - Jul 1974 | -9% |
| Feb 1977 - Jun 1981 | 11% |
| Mar 1983 - Aug 1984 | 13% |
| Jan 1987 - May 1989 | 16% |
| Feb 1994 - Feb 1995 | 4% |
| Jun 1999 - May 2000 | 10% |
| Jun 2004 - Jun 2006 | 8% |
| Dec 2015 - Dec 2018 | 8% |
Source: Morningstar, Haver Analytics, March 2022
Not only that, the S&P 500 Index has had positive returns 11 out of 12 times during periods of rising interest rates. Despite the short-term impact to the market, stocks often weather the storm.
Finding Bright Spots
In summary, it is helpful to remember the following historical characteristics of a bear market:
- Extreme pessimism
- Short-lived
- Higher macroeconomic shocks (employment, sales, PMI)
Investors can find opportunities by considering a contrarian point of view and learning from the time-tested experience of investing legends.
Infographics
A New Framework for Personalized Financial Portfolio Alignment
The MSCI Similarity Score compares a client’s financial portfolio to a model portfolio based on risk exposures, allowing for personalization.
A New Framework for Personalized Financial Portfolio Alignment
There’s a tension between clients’ need for personalization and the one-size-fits-all approach of model portfolios. Traditionally, wealth management firms check financial portfolio alignment based on exact holdings. However, some level of mismatch with a model portfolio is inevitable due to client preferences and circumstances.
How can advisors meet the personalization needs of their clients at scale?
This graphic, created in partnership with MSCI Wealth, highlights a new framework called the MSCI Similarity Score that allows for customization.
Introducing the MSCI Similarity Score
With the MSCI Similarity Score, firms can assess financial portfolio alignment in a simple, single score. A score of 0 indicates no alignment, while a score of 100 indicates full alignment.
The score measures how similarly a client portfolio behaves compared to a firm’s model portfolio based on various factors. For equity, this includes things like the country and industry of a company, as well as the strategies used, such as targeting growth stocks. For instance, two U.S. technology growth stocks may behave similarly in response to market movements.
This approach allows for more flexibility to meet clients’ unique goals and risk appetites. It’s a similar idea to someone counting calories, rather than restricting their diet to specific foods.
Seeing the Score in Action
How does the MSCI Similarity Score work in practice? Consider a hypothetical U.S. client that an advisor is onboarding.
The advisor has assigned the client to a high-quality global equity model portfolio, and is checking alignment.
| Name | Model Allocation | Client Allocation | Difference |
|---|---|---|---|
| Core Total US Stock Market ETF | -- | 30% | -30% |
| MSCI USA Quality Factor ETF | -- | 10% | -10% |
| Total Stock Market ETF | 40% | -- | 40% |
| Core MSCI EAFE ETF | -- | 8% | -8% |
| MSCI Emerging Markets ETF | -- | 4% | -4% |
| MSCI INTL Quality Factor ETF | -- | 3% | -3% |
| MSCI ACWI ex-US ETF | 20% | -- | 20% |
| 7-10 Year Treasury Bond ETF | -- | 15% | -15% |
| Corporate Bond ETF | -- | 8% | -8% |
| 1-3 Year Treasury Bond ETF | -- | 3% | -3% |
| Core US Aggregate Bond ETF | 30% | -- | 30% |
| Private Equity Fund | -- | 10% | -10% |
| Corporate Lending Fund | 5% | 10% | -5% |
| Gold ETF | 5% | -- | 5% |
Specific funds and ETFs are for illustration only and do not constitute recommendations.
The client’s holdings are quite different from those of the model portfolio.
However, using the MSCI Similarity Score, the advisor compares the two portfolios on the factors driving their performance.
MSCI Similarity Score Breakdown
Starting from a perfect score of 100, each difference in risk exposure between the client’s portfolio and the model portfolio reduces the score.
| Risk Factor | Score |
|---|---|
| Starting Point: Perfect Alignment | 100.0% |
| Global Equity | -7.5% |
| Commodities | -4.9% |
| US Private Equity | -2.3% |
| U.S. Equity | -1.9% |
| USD Rates Level | -0.4% |
| Final Similarity Score | 83.0% |
The biggest difference between the two portfolios is their exposure to global equity risk.
With a strong Similarity Score of 83.0%, the advisor can see that the drivers of risk for both portfolios are closely aligned despite holding different funds.
A Flexible Approach to Financial Portfolio Alignment
The MSCI Similarity Score helps wealth management firms assess alignment between a client portfolio and model portfolio based on their behavior, rather than exact holdings.
This approach has a number of benefits.
- Personalization: Wealth managers can customize client solutions without sacrificing portfolio alignment.
- Transparency: Clients can see how their financial portfolio aligns with the firm’s recommendation, building their confidence in their investments.
- Scalability: Firms can quickly see the score across multiple portfolios, helping them manage thousands of clients efficiently.
As client needs evolve, the MSCI Similarity Score is a simple and innovative way to customize financial portfolio alignment.
Learn more about the MSCI Similarity Score.
Infographics
The 20 Most Common Investment Mistakes, in One Chart
Here are the top investment mistakes to avoid, from emotionally driven investing to paying too much in fees.
The 20 Most Common Investment Mistakes
No one is immune to errors, including the best investors in the world.
Fortunately, investment mistakes can provide valuable lessons over time, providing investors an opportunity to gain insights on investing—and build more resilient portfolios.
This graphic shows the top 20 mistakes to watch out for, according to the CFA Institute.
20 Investment Mistakes to Avoid
From emotionally driven investment decisions to paying too much on fees, here are some mistakes that investors commonly make:
| Top 20 Mistakes | Description |
|---|---|
| 1. Expecting Too Much | Having reasonable return expectations helps investors keep a long-term view without reacting emotionally. |
| 2. No Investment Goals | Often investors focus on short-term returns or the latest investment craze instead of their long-term investment goals. |
| 3. Not Diversifying | Diversifying prevents a single stock from drastically impacting the value of your portfolio. |
| 4. Focusing on the Short Term | It’s easy to focus on the short term, but this can make investors second-guess their original strategy and make careless decisions. |
| 5. Buying High and Selling Low | Investor behavior during market swings often hinders overall performance. |
| 6. Trading Too Much | One study shows that the most active traders underperformed the U.S. stock market by 6.5% on average annually. Source: The Journal of Finance |
| 7. Paying Too Much in Fees | Fees can meaningfully impact your overall investment performance, especially over the long run. |
| 8. Focusing Too Much on Taxes | While tax-loss harvesting can boost returns, making a decision solely based on its tax consequences may not always be merited. |
| 9. Not Reviewing Investments Regularly | Review your portfolio quarterly or annually to make sure you’re staying on track or if your portfolio is in need of rebalancing. |
| 10. Misunderstanding Risk | Too much risk can take you out of your comfort zone, but too little risk may result in lower returns that do not reach your financial goals. Recognize the right balance for your personal situation. |
| 11. Not Knowing Your Performance | Often, investors don’t actually know the performance of their investments. Review your returns to track if you are meeting your investment goals factoring in fees and inflation. |
| 12. Reacting to the Media | Negative news in the short-term can trigger fear, but remember to focus on the long run. |
| 13. Forgetting About Inflation | Historically, inflation has averaged 4% annually. Value of $100 at 4% Annual Inflation After 1 Year: $96 After 20 Years: $44 |
| 14. Trying to Time the Market | Market timing is extremely hard. Staying in the market can generate much higher returns versus trying to time the market perfectly. |
| 15. Not Doing Due Diligence | Check the credentials of your advisor through sites like BrokerCheck, which shows their employment history and complaints. |
| 16. Working With the Wrong Advisor | Taking the time to find the right advisor is worth it. Vet your advisor carefully to ensure your goals are aligned. |
| 17. Investing With Emotions | Although it can be challenging, remember to stay rational during market fluctuations. |
| 18. Chasing Yield | High-yielding investments often carry the highest risk. Carefully assess your risk profile before investing in these types of assets. |
| 19. Neglecting to Start | Consider two people investing $200 monthly assuming a 7% annual rate of return until the age of 65. If one person started at age 25, their end portfolio would be $520K, but if the other started at 35 it would total about $245K. |
| 20. Not Controlling What You Can | While no one can predict the market, investors can control small contributions over time, which can have powerful outcomes. |
For instance, not properly diversifying can expose you to higher risk. Holding one concentrated position can drastically impact the value of your portfolio when prices fluctuate.
In fact, one study shows that the optimal diversification for a large-cap portfolio is holding 15 stocks. In this way, it helps capture the highest possible return relative to risk. When it came to a small-cap portfolio, the number of stocks rose to 26 for optimal risk reduction.
It’s worth noting that one size does not fit all, and seeking financial advice can help you find the right balance based on your financial goals.
Another common mistake is trading too much. Since each trade can rake up fees, this can impact your overall portfolio performance. A separate study showed that the most active traders saw the worst returns, underperforming the U.S. stock market by 6.5% on average annually.
Finally, it’s important to carefully monitor your investments regularly as market conditions change, factoring in fees and inflation. This will let you know if your investments are on track, or if you need to adjust based on changing personal circumstances or other factors.
Controlling What You Can
To help avoid these mistakes, investors can remember to stay rational and focus on their long-term goals. Building a solid portfolio often involves assessing the following factors:
- Financial goals
- Current income
- Spending habits
- Market environment
- Expected returns
With these factors in mind, investors can avoid focusing on short-term market swings, and control what they can. Making small investments over the long run can have powerful effects, with the potential to accumulate significant wealth simply by investing consistently over time.
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