Editor's note: Originally published on June 23, 2014
We've experienced a number of years over the recent past where the broad stock market average produced a negative rate of return. The years 2000, 2001, 2002 and 2008 all produced negative returns for someone invested in a stock index fund. Experiencing the occasional bear market year in stocks is inevitable for those investors following a buy-and-hold approach to stock investing. Given the difficulty in market timing stocks over the long term, buy-and-hold investors will on occasion be forced to endure bear market years in their portfolio.
If someone restricts their stock purchases to only ones trading below liquidation value, bear market years don't have to be quite as severe on average relative to holding a stock index fund. The graph shows the performance of different asset classes over the last 60 years when the broad market average recorded a negative return for the year. Some of the bear market years resulted in only a few stocks trading below liquidation value or net current asset value (NCAV). In those years, the balance was invested in Treasury Bills. There were 14 years over our 60 year study period where a stock index fund produced a negative return. In 12 of those 14 years, our net current asset value portfolio managed to outperform an index fund.
Restricting purchases to value stocks advocated by Benjamin Graham that trade below net current asset value (NCAV) ease the drawdown when stocks have a bad year. On average, these select value stocks still manage to squeak out a positive return with performance competitive with other traditional asset classes that investors flock towards during bear markets such as bonds and gold.