The Current Bear Market?
The current bear market is, in large part, a result of the housing bubble, which was fueled by easy-to-obtain subprime mortgages, lax regulation of mortgage brokers, housing speculation and exotic investments based on the securitization of mortgages. It has led to a credit crunch, bank losses in the US and abroad, and worldwide credit turmoil.
How Long Do Bear Markets Last?
We don't know how long this bear market will last. A long term look at the history of the Dow Jones Industrial Average shows that the stock market has come back after bear markets, but investors had to suffer substantial pain. In 2000, it took five years , but after the 1990 crash, it took only 8 months. Since 1900, a bear market has occurred once every 3 1/2 years on average and has lasted about 329 days.
What to Do...
Past market declines have taught us important lessons about bear markets. Here are some things to consider.
1. Don't try to jump in and out of the market.
Successful market timing is extremely difficult because it requires two nearly perfect actions - getting out at the right time, and getting back in at the right time. A common mistake investors make is to lose patience and sell at or near the bottom of a bear market.
2. Stay calm and meet with me.
It can be helpful during a bear market to take another look at your investment goals, time horizon, risk tolerance, and financial circumstances. A bear market may be a good time to re-examine your strategy even though you might not want to make any moves.
3. Maintain a diversified investment portfolio.
In any type of market (bull or bear), you can spread your risks by selecting a mix of assets including equities (stocks) of large companies, small companies, international companies, bonds, real estate, money markets, etc.
4. Invest regularly every month or quarter.
Regular investing encourages discipline and is an important strategy for taking the emotion out of investing. Although it doesn't guarantee a profit or protect against loss, regular investing is one way to take advantage of a bear market. Since you are investing the same dollar amount regularly, you end up buying more shares when the price is down. You should, however, consider your willingness to keep investing when share prices are declining.
5. Set aside cash for emergencies.
It's always a good idea to have an emergency fund in cash reserves. If your emergency fund is invested in the markets, you may find you're forced to sell and have less money when you need it most. Emergency funds inherently have a short-term time horizon. You may need it tomorrow. This is more a savings fund than an investment fund. Use liquid money market funds, CDs or short-term, high-quality bond funds when determining where to put your emergency fund monies. All you want is an interest bearing cookie jar.
A bear market is defined as a decline of 20% or more from a market high. It typically follows a market "bubble". When a down market begins, it initially affects one part of the market, and gradually the losses spread widely to related industries and then even to strong companies. The most recent example was the Internet inspired bubble which began in 2000 and ended in 2002.
Over the last five years Standard & Poor's stock indexes have beaten the majority of actively managed funds, the company said. The S&P 500 beat almost 69 percent of large-cap stock funds, its SmallCap 600 index beat 78 percent of small-cap funds, and its bond indexes beat 75 percent of bond funds.
