Volatility is back in the equity markets with a vengeance. After years of calm and rising markets even a small decline of 2-3% feels like a major fall. Some investors may wonder if we are heading towards a bear market. Even if a corrections turns into a bear market, bear markets usually do not last too long according to research by Schwab. Their research showed that the average bear market last just over a year (505 days). The longest bear market lasted about two and half years but then it was followed by a five year bull market. The data sample used for the study was S&P 500 price returns going back to 1966.

The following chart shows the bear and bull market returns for the S&P 500:

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Source: Schwab Center for Financial Research with data provided by Bloomberg. The market is represented by daily price returns of the S&P 500^® Index. Bear markets are defined as periods with cumulative declines of at least 20% from the previous peak close. Its duration is measured as the number of days from the previous peak close to the lowest close reached after it has fallen at least 20%. In the chart, periods between bear markets are designated as bull markets.  Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance does not guarantee future results.

Source: Volatile Markets: Here’s What You Should Know, Schwab, Feb 9, 2018

The key takeaway is that it is impossible to time the markets. The easiest way to handle the bear is to focus on the long-term and not panic with short-term declines. Over a course of holding stocks for a few decades a long-term investor will invariably face a few bear markets.

In his latest column, Jason Zweig, one of my favorite financial author writes about the need for patience and strong stomachs when markets turn volatile like it did in the past weeks. Using his personal experience during the financial crisis of 2008-09 he gives some valuable advice for long-term investors.

From the article:

To paraphrase the boxer Mike Tyson, investors always have a plan until the market punches them in the face.

After U.S. stocks dropped roughly 10% in ten trading days, it’s more important than ever for individuals to understand what it means, and what it takes, to be a long-term investor.

There was a lot of crowing this past Tuesday when the S&P 500 rose nearly 2% after a 4.1% drop on Monday. Cries of “buy on the dip” rang throughout the land.

Buying on the dip, when stocks go down a few percentage points, isn’t so hard. Can you keep buying, or even merely hold on, if stocks go down 50% or more? That’s the question I’ve been asking myself this past week — not because I believe that’s about to happen, but because I know it can.

The best way to answer that question is to look back at what you did in 2008 and 2009, if you were investing then.

I did just that last night, poring through my old account records online to check whether my memory is accurate. Humans have a remarkable ability to make rearview mirrors out of rose-colored glass. So I wasn’t sure whether my recollection of buying more stocks throughout 2008 and early 2009, as the market kept dropping in nauseating swoops, was just a myth I’d been telling myself.

It turned out that between the market’s peak on Oct. 9, 2007 and its bottom on March 9, 2009, I repeatedly, almost obsessively, pumped any idle cash into stocks.

Source: When Investing in Stocks Makes You Feel Like Throwing Up and You Do It Anyway, WSJ, Feb 9, 2018

The entire article is worth a read.

The withholding tax rates for dividends by country has been updated by S&P Dow Jones for 2018. This is a simple and quick reference table to identify the withholding tax rate for a country.

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Source: S&P Dow Jones Indices

Download: Dividend Withholding Tax Rates by Country for 2018 (in pdf)

Related:

• Dividend Withholding Tax Rates by Country for 2019

Mitigating the severity of losses is very important for retail investors. This is because recouping losses is extremely difficult as the percentage of loss becomes higher. For example, to recover or break even from a loss of 50% one would need to make a gain of 100% which is not easy by any means.

From an article by Mathew Young at Richard C Young Ltd:

Mitigating losses is vital for retired investors and those approaching retirement. As the chart below illustrates, when your portfolio falls by 10%, you only need an 11% gain to get back to even. Increase the size of that loss to 25%, and you need a 33% gain to break even—high but doable. Now look at the gain needed to recover from a 50% loss and a 70% loss. To break even from a 50% loss you need a 100% gain, and to break even from a 70% loss—the NASDAQ fell 78% during the dotcom bust—you have to more than triple your money.

Source: Client Letter December 2017- What to Expect from Stocks, Young Investments

Below are a few points to remember:

• Cutting losses is a critical investment skill. In fact, taking losses us tougher than making gains on an investment since we feel losing money more.
• Instead of holding a stock with heavy losses and no sign of recovery it is better to take the tax write-off and move on.
• Always keep track of tax consequences when booking losses.
• Losing money is part of the investment process and anyone who hates losing any amount of money is better off staying away from equity markets.