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| | Understand Bear Markets |  | | HOW DO YOU SURVIVE A BEAR MARKET? | | Most people lose money in bear markets because they act like victims instead of opportunists. They believe bear markets are bad, and they cash out to cut their losses.
The truth is ... there is no such thing as a "bad market" or a "good market." There is just "the market." What occurs in a bear market is much less important than how surprised you are by its occurrence. The more that you are surprised, the more likely you are to see yourself as a victim and make one or more Big Mistakes. Also, your perception of a bear market is critical. If you think "this time is different," you'll probably panic out.
In reality, bear markets mean very little over the long run.
Study HISTORY
Securities market history is the story of a permanent advance punctuated by significant yet temporary declines. About one year in five, the market comes down temporarily. There have been 12 bear markets (13 if you count the one we're in now) since the end of World War II. The average decline was 30%. If you know that bear markets are always coming, you can't be surprised. The effect of the declines has been negligible in the big picture.
If you had invested $1,000 in the S&P 500 on the first trading day in 1945 and left it to compound, today it would be worth more than $1 million! The market effortlessly compounded equity 1,000 times during this period, notwithstanding the occurrence of 12 bear markets.
A more recent examination of bear markets (which falls within the time frame of an average retirement) reveals that there have been three severe bear markets since the 1987 event (1990-91, 1998, and the worst bear market since the Great Depression in 2000-02). Yet the S&P 500 is today about seven times higher than it was at the end of the 1987 decline.
Don't ever believe that you can get out at the top and back in at the bottom. No one can consistently be right twice. A market timing strategy is a fool's errand. In order to capture all of the ups, you must be willing to sit through all of the downs.
DON'T be alarmed
History teaches us that all serious economic and financial problems in the world eventually get solved and give way to new problems, which are solved in turn.
The media, however, ignores this truth. Every major market event is reported as an epic crisis, and is just different enough in the details to convince most of us that "this time is different." And in that mean spirit, the media always presents bear markets as the end of the world.
The reason news coverage is always bad is that bad news sells. One of the oldest axioms in journalism is "bad news is good copy." Tomorrow, the media will surely portray yet another crisis as the incipient end of the world. And if there is no crisis to report on, they will fabricate one and broadcast it around the clock.
The news can turn just about anyone into a pessimist. Pessimism, however, is always the wrong attitude to have, especially in bear markets.
The four most dangerous words in investing are "this time is different."
When people panic in a bear market, it becomes very difficult for them to see that by cashing out their equities, they turn a temporary decline into a permanent loss. Bear markets are an integral part of the market process. The wise investor knows that "this time is not different." The market cycle has not been repealed. She realizes that when the current crisis burns itself out, she has an opportunity to buy equities at prices no one will likely see again.
Stay INVESTED
Dollar Cost Averaging is a powerful wealth-creating strategy characterized by regular monthly investment. By investing the same dollar amount every month, you end up buying more shares as prices fall in a declining market and fewer shares as prices rise in a market recovery. Thus, you end up buying the largest number of shares at market bottoms and the fewest shares at market peaks.
Dollar Cost Averaging will help you to really appreciate bear markets. And for investors still accumulating, bear markets can't come along too often, or go down too much. Most people, however, have a proclivity to panic during a bear market because they do not understand that there is an inverse relationship between price and value. As the price of an equity investment goes down, its risk goes down and its value goes up. Thus, bear markets are where we make our money. Be optimistic and take advantage of the big sale!
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| Investment advice provided by John Zarcaro, Inc., a Registered Investment Advisor.
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