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“Lost Decade” for Bulls Was Even Worse for the Perma-Bears

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

Even with the big rally since March 2009, it's been a tough decade for long-term buy and hold investors. But it's been even worse for the perma-bears, judging by the performance of so-called bear funds.

For the 10 years ended March 30, the average bear fund lost an average of 10% annually, the worst-performing strategy among the 90 tracked by Morningstar. Bear funds have also been the worst-performing group in the past 5 years, with an average annual decline of 13%.

Adding insult to injury, bear funds have an average expense ratio of 2% vs. 1.3% for traditional long-only equity funds, Bloomberg reports.

If bear funds couldn't prosper during the worst decade for stocks since the Great Depression, is there any place for them in your portfolio?

As with betting from the long side in recent years, timing is everything: 2008 was a very good year for the bears, with the average fund up 30%. That drew tons of spooked individual investors into the strategy, with assets peaking at $5.5 billion at the end of 2010.

But bear funds lost 34% in 2009, another 24% in 2010 and are presumably suffering again in 2011; major U.S. averages hit three-year highs ahead of Friday's holiday closure.

On the surface, having some assets in a bear fund seems like a good hedge against another market rout. But that's only if accompanied by regular rebalancing and other prudent money management techniques; just like being long stocks you can't "buy and hold" bear funds, as Henry and I discuss in the accompanying video.

Such advice may be self-evident, but many investors still don't heed it.