While
we can try to provide a theoretical explanation for the dynamics of
market declines, this is no replacement for first-hand knowledge of
the market. You have to experience the heartbreak and upset stomach of
a bear market to fully understand it.
Some things to keep in mind:
A bear market is not a market
crash. While market declines are popularly associated with
rapid, catastrophic losses such as the Crash of 1929, most bear
markets are not so dramatic. During the period from January 1973
to September 1974, the S&P Index dropped from a high of 121.74
to a low of 60.96 -- a loss of almost 50% in value. But this did
not happen in a single, dramatic loss. It was a long, grinding
decline stretched out over 21 months. Although there is no exact
definition of a bear market in terms of length of time and amount
of loss, it is generally agreed that a bear lasts for a period of
months or years and involves a market loss of 15% or more.
If you invest over a long period,
chances are you'll see one or more bear markets. Although the
early 1990s saw some brief lagging periods in the stock market,
there really hasn't been a sizable or lengthy bear market for over
a decade. No one knows when this trend will end, but based on
history and the cyclical nature of markets, we can expect that it
will end sometime.
Market timing is no more
effective in a bear market than at any other time. Since we're
talking about a gradual decline, it might seem that you can easily
"jump out" of the stock market and avoid the worst of a
bear market -- simply sell off when it's clear that things are
turning downward. But it's never clear that a trend will continue.
Occasionally, short-term "corrections" do occur, in
which the market drops but then recovers quickly. These drops can
set off fears that the market might be heading into a bear period.
But in such cases it would be a mistake to sell in order to avoid
further decline, because the market does recover.
Loss is inevitable. There
really aren't any tricks you can play to guarantee the value of
your investment won't decline in a bear market. Fortunately, a
sound investment plan should allow you to weather bad times
without an undue amount of loss. To get an idea of what it's like
to invest during a bear market, meet....
While
we can try to provide a theoretical explanation for the dynamics of
market declines, this is no replacement for first-hand knowledge of
the market. You have to experience the heartbreak and upset stomach of
a bear market to fully understand it.
